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.

Pension Reform

On Thursday evening, March 29, the General Assembly passed an amended version of pension reform legislation and delivered it to the Governor.  I supported the legislation to prevent a collapse of the various pension systems, to require the legislature to spend more money toward pensions annually, and to make certain Kentucky is able to provide a retirement benefit for its future hires.

Senate Bill 151 does not change, reduce, or remove cost-of-living adjustments (COLAs) for retired teachers, and no public employee is forced into a 401(k)-style plan. Teachers are not required to stay in the classroom any longer before they can retire and their end-of-career benefit enhancements (High 3 / 3.0 factor) remain in place.
 
Senate Bill 151 does make one change to retirement benefits for current teachers.  In a change taken directly from the Superintendents’ Shared Responsibility Plan—a measure supported by the Kentucky Education Association (KEA)—teachers will no longer be able to use sick days earned after January 1, 2019 to enhance their final retirement calculation. But teachers can still use their existing sick days to enhance their final year of compensation when they retire. It is important to note, no teacher will ever lose a sick day and he or she will not be forced to retire to use their existing sick days for retirement. Teachers will still be able to cash-in sick days earned after January 1, 2019 at retirement and receive a check for them.
 
Teachers hired after January 1, 2019 will have their retirement funded by a “hybrid cash balance plan” administered by the Kentucky Teachers Retirement System (KTRS or TRS), the same system that current manages teachers’ retirements.  This plan was carefully designed to provide new teachers with a retirement income equivalent to the current system’s benefits, and new teachers’ retirement contributions will be invested by TRS in the exact same way current teachers’ contributions are invested.

Many have emailed, called or texted me since the debate began, understandably asking questions.  I thought the best way to respond might be to put some of the most common questions here with answers:

• Why didn't tax reform happen first? 
  • Because of time. They aren’t done debating what any tax package would look like, and then it has to be written and checked.  Passing this first also puts pressure on legislators to vote for a tax plan that otherwise might not be there.
• Where was the actuarial analysis of the bill that was passed?
  • There was one. It’s linked below.
• Why was a committee on infrastructure handed a bill about pension reform?
  • The committee was the House equivalent to the Senate’s State & Local Government committee, whose jurisdiction is perfectly appropriate.  You can read the jurisdiction of the House committee here, which specifically includes pensions.
• Why was the bill snuck through at the last minute?
  • It wasn’t "snuck" through at all, and, in fact, has had more debate and scrutiny than any other bill of the entire session.  The language of SB151 was exactly like SB1 but with several requested deletions.  The language had been public for over a month.  Some of the legislators complaining about not having seen the bill promptly gave lengthy floor speeches about provisions in the bill.
  • The timing was also a factor because we only had four days remaining and it takes five days to move a bill from start to finish.  So they put the language into a Senate Bill that was procedurally further along.  Had there been a bunch of new language or policy that hadn’t been part of the discussion over the course of session I would’ve objected.
• Why weren't opponents allowed to have their voices heard?
  • The opponents to this bill were heard, and sincerely listened to.  In my time in the Senate no other group has had protestors for weeks straight. No other bill has been reported on and covered by the media like this one. No other bill has undergone the substantial changes this one has as a result of hearing and listening to the voices of opposition.  Your voices changed the bill!
• If new teachers no longer contribute to the plan, how can I expect the money to be there when I retire?
  • The bill requires the state to pay far more than what current law requires. This bill stops the digging and then requires future legislatures to pony up substantially more money every time.
• Why no inviolable contract?
  • This is only for future hires.  It’s not wise to bind future legislatures in perpetuity to a contractual obligation when we don’t know what position the state will be in down the road — it’s part of the reason we’re in this boat.
• The original bill was expected to save money with COLA reductions that have now been removed.  How will this save money?
  • This bill will not save nearly as much money as prior versions of the bill would have saved.   But again, the problem isn’t just about saving money, it’s stopping the unfunded liability hole from getting any bigger. This bill stops that digging, and requires us to contribute much more on an ongoing basis.

One additional question that continues to be raised is regarding retiree health insurance between retirement and Medicare eligibility.  This “gap” insurance was restored for retirees by the House and Senate versions of the budget, and I fully expect it will remain funded in the conference committee’s compromise budget document.

Below are links to the following documents, which I encourage you to read through:

Senate Bill 1 - Funding Our Future

Earlier this evening, Senator Joe Bowen (R, Owensboro) filed Senate Bill 1, the much anticipated pension reform bill that seeks to put Kentucky on a path to fiscal solvency and benefit sustainability.  The following press release was issued (the links to the bill and a section-by-section summary is at the bottom):

SENATOR JOE BOWEN FILES PENSION REFORM MEASURE AS SENATE BILL 1

FRANKFORT, Ky. (February 20, 2018) – State Senator Joe Bowen (R-Owensboro) on Tuesday filed Senate Bill (SB) 1, representing the highly anticipated pension reform proposal from the Senate Majority Caucus. SB 1 contains significant changes from the initial pension reform proposal released in October of 2017.

Senate Bill 1 would not force any current or future state employees or teachers into a defined contribution (401(k)-style) retirement plan. It also would not require all employees and teachers to pay an extra three percent of their salary for a retiree health benefit. And, the bill does not create an incentive for employees and teachers to retire at their earliest possible eligibility by ending the ability to accrue more service credit in their current defined benefit plan.
“We are committed to funding our plan, meeting our obligations to state employees, and to making systemic reforms to ensure these systems will be financially sound for current and future employees,” Senate President Robert Stivers (R-Manchester) said. “When this bill passes, we will over time eliminate the unfunded liability that has been estimated to be as much as $60 billion.”

“When a pension reform proposal was first released in the fall of 2017, there were several issues raised by teacher groups, state employees, retirees, and taxpayers,” House Speaker Pro Tem David Osborne (R-Prospect) said. “This plan is our attempt to address many of those issues brought to us. We listened to the concerns, and this bill represents a compromise that will bring our pension systems to the appropriate funding levels over a 30-year period.”

“This bill represents countless hours of work by countless individuals that will directly address the unfunded liability in Kentucky’s ailing pension systems,” Bowen said. “We listened to key stakeholders, experts, and taxpayers, and we are confident our new plan balances the need to stabilize the system while honoring the commitments we have made.”
To access Senate Bill 1 in full, please visit www.lrc.ky.gov.

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Pension Bill Draft

As promised, linked below is the draft of the pension reform legislation, along with a section-by-section guide to help navigate the bill, and finally a side-by-side benefit comparison chart.

Pension Reform Proposal

UPDATED (9:59am CST): According to the Governor's office, the hazardous section was mistakenly omitted from the first document.  I have replaced the linked PDF below.

Senate, House and Executive Branch leadership have met for months discussing and debating what reforms we should pass to address Kentucky's ailing pensions systems.  The finer points of the legislation itself (a bill I'm told that is in excess of 500 pages) is still being put through statute revision (a key step in all legislation to check for errors) and proofread.  In the meantime, the folks working on the bill have prepared a summary of key points based on the bill.  Again, this is not a wishlist.  These provisions are contained in the bill itself.

Click below to download the summary:

As soon as the legislation is available I will be posting the full text here on the blog so be sure to bookmark the site, follow me at the links below to catch all the updates.