Kentucky Bill Would Allow Institutions to Leave Troubled Retirement System

Some secondary institutions throughout the state of Kentucky may be able to dodge soaring pension costs affiliated with the Kentucky Employees’ Retirement System through legislation that passed the state’s house and senate last week.

The state’s health departments and colleges were expected to serve a rate hike from 49% to 83% to help fund the Kentucky system, which is currently about $15 billion short to pay out benefits over the next several years.

Chris Freeland, one of the legislation’s sponsors, insisted that although the bill itself is not perfect, it was absolutely necessary to avoid some of the state’s most important social infrastructure assets to avoid shutting down.

“At least 42 of our rural health departments would close and many others said their only option would be to slash employment and services,” Freeland told CIO. “Our local health department here in Marshall County would see a third of their entire budget earmarked solely for pensions. They can’t operate under those conditions.”

The legislation allows secondary institutions to keep the current 49% rate for one additional year, and allows “tier 1 and tier 2” employees to remain in the pension with the option of buying themselves out of the pension system.

“What all this means is that our local health departments and regional university will be able to stay open and be able to address their employee retirement plan,” Freeland added. “It’s far from a perfect bill and unfortunately will add additional strain to KERS’ liability.”

Numerous reports quoted the damage to the Kentucky system from the bill at about $700 million to $800 million, leaving the remaining participants—the state’s government employees—to shore up the shortfall. “This is idiotic and irresponsible,” said Jim Carroll, president of Kentucky Government Retirees, an advocacy group for retirees and active employees covered under Kentucky retirement systems.

“The KRS actuary concluded the installment scheme [which allows institutions to buy-out their participation in the system through timely payments] represents a ‘material financial cost and risk’ to KERS,” Carroll opined on Twitter. “The KRS actuary didn’t merely point out the huge shortcomings of HB 35, it proposed a solution—a pension obligation bond to fund lump sum payments.”

“There is no good solution or easy fix to solving this issue and we chose the best possible answer we could,” Freeland told CIO. “It’s worth noting that if past legislators over the last 20 plus years would have done their jobs, we wouldn’t be faced with this crisis.”

Kentucky has tried to address its funding gap through several different approaches. In January, a legislative committee was formed and tasked with examining the pension’s financial issues.

In late 2018, Kentucky Attorney General Andy Beshear called on state lawmakers to pass legislation that would legalize gambling in order to create a dedicated source of revenue to support the state’s struggling pension funds.