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Quasi Quandary

Quasi Quandary

You have probably heard of the imminent extraordinary or “special” session of the Kentucky General Assembly. Included in the Governor’s veto message on HB358 from the 2019 Regular Session was a promise to issue a call for an extraordinary session to address the pension problem for quasi-governmental agencies before July 1. So what is this pension problem anyway?

Quasi-governmental agencies are pretty much exactly what their name suggests: agencies that are not explicitly government departments, but are exclusively (or very nearly exclusively) funded by government (read: taxpayer) funds, and they each perform essential functions for the populations they serve.* These agencies are designated as non-profit organizations. The Christian County Health Department, Pennyrile Children’s Advocacy Center, Sanctuary, and the Pennyroyal Mental Health Center are some of the primary quasi’s in this area, though the last three in that list have a service regions that extend well beyond our own county line.

No other agencies or arms of state government exist to perform any of these services.

A few decades ago, someone thought it would be good to include these agencies in the Kentucky Retirement Systems. I don’t think that’s a bad idea necessarily, and at the time it looked like a very good one. The employer contribution rate for each participating employee was very low. However, with time, that employer rate has climbed up. Today these agencies are paying somewhere in the neighborhood of 49% of payroll. That means, for every dollar of payroll, the agency is having to find another 49¢ to send to KRS. First, for these non-profit agencies, finding that additional 49¢ is very challenging, as it starves out funding for other important needs like adequately compensating staff, procuring important supplies, expanding their critical services (which all our communities need), or even maintaining their locations. Second, the 49¢ is actually way lower than it should be to keep KRS funded adequately. In truth the employer contribution rate should have been steadily climbing for many years.

So, here we are, facing a July 1st deadline when the rate jumps to at least 83% overnight. For other participating employers not deemed quasi-governmental we’ve already passed a solution that phases in that rate increase over time. Cities and counties now have a new imperative to find all the revenue they can to make ends meet. HB358 as passed this year would have forestalled that big rate jump for quasi-governmental agencies for a year while these agencies decide whether and how to proceed, by staying in the system or getting out, both of which would have resulted in increased costs. The veto struck that bill in its entirety, so without a special session to pass something else that offers immediate relief, the rate jumps up come July. With that enormous rate increase comes the almost certain reduction in staff and services for most, if not all, quasi agencies.

We risk the loss of staff and services from a group of agencies that provide services the state is neither prepared nor equipped to provide. The Pennyrile Children’s Advocacy Center performs forensic interviews and provides vital care and services for children victimized by sexual assault. Just a couple short months ago the Christian County Health Department helped administer hundreds of vaccinations for Hep-A after a handful of cases hit the county jail. Sanctuary provides emergency housing and security, among other services, for women and their children in need of escaping physical abuse. No other agencies or arms of state government exist to perform any of these services. PCAC, Sanctuary and the Pennyroyal Center serve multiple counties. If their employer contribution rate goes up in July those service footprints in other areas are at risk of evaporating.

On the other hand, the Kentucky Retirement System needs to be made whole. Even giving cities and counties phase-in relief last year hurt the CERS bottom line. Every day a participating employer or employee (or legislature) doesn’t pay all they’re supposed to, the system and its retirees get shortchanged. We can’t afford KRS going under. We can’t afford these agencies going under. A balance must be found.

We can’t afford KRS going under. We can’t afford these agencies going under. A balance must be found.

The Governor has done what legislative leadership asked following his veto: come to us with proposal. I attended a briefing conducted by his senior staff last week and I raised a number of questions. The bill includes a one year rate freeze for quasi agencies, and grants them that time to decide which path they want to take: stay in and pay full freight, or get out of the system through one of three different doors. I believe the agencies that cannot afford to pay the full price of staying in should get out of the system, but I firmly believe they should be given a way out that is affordable. The proposal provides only one way out that is truly affordable to most of these agencies, called the “hard freeze,” and requires all Tier 1 and 2 (the senior most) employees to be pulled out of the system along with the agency. Those workers will of course keep everything they’ve accrued, but cannot earn any additional time toward their retirement mark in KRS as long as they remain with that employer. I disagree with pulling those folks out of the system. The options that allow those employees to remain are cost prohibitive for all but the most wealthy quasi agencies, and I’m not aware of any agency in the three counties I represent that can afford them.

There are other concerns, unique to certain quasi agencies, including the change to how their payments to KRS are classified. State and Federal grant funds that flow to places like Sanctuary restrict the use of those dollars for costs directly related to personnel, and attached “fringe benefits.” The proposal would require payments from the agencies toward the unfunded liability, not explicitly connected to payroll, making today’s grant dollars used for payroll unavailable for tomorrow’s debt service.

Similarly, there are three community mental health centers, including the Pennyroyal Center, who act purely as hiring agents for the state when staffing certain facilities. Those employees are governed entirely by the state, but they are currently counted against the CMCHs’ unfunded liability. This is not right. Unfortunately, the proposal before us addresses neither of these issues, and I have been given no affirmative assurance that there will be a material, meaningful effort to fix those problems in the 2020 Regular Session.

I’ve asked the Governor and his team to make modest adjustments to the proposal to make the cessation options slightly more affordable, and to address these two issues that directly impact the local agencies for whom I speak in Frankfort. Unfortunately, I have received no feedback that suggests changes to the proposal would be welcome. I will continue to advocate for those changes, ahead of any potential special session, and during the 2020 session if need be. Needless to say, this issue is among the most complicated the legislature has had to deal with. Getting the answer just right is that much more important.

* The group of quasi-governmental agencies also include all public universities in the Commonwealth other than UK and UofL, both of whom have their own pension systems. However, this post is about all the quasi’s other than the universities. These institutions are also vital to the Commonwealth, but they are on a much different fiscal footing than all the others. They are able to raise tuition and fees, they each have private foundations, and generally have more assets than the rest of the quasi group. To my knowledge, the public university group has been satisfied with each version of HB358 that was passed during the regular session and they are in support of the Governor’s proposal.