As the primary sponsor of the pension reform bill (House Bill 1) which passed the General Assembly Friday, and the House lead negotiator in the process that led to this historic legislation, there’s much I’d like to share with you. I suppose, though, what we accomplished, not the laborious and difficult process by which we — the House and Senate — reached agreement, is what’s important.
With that in mind, and before attempting to condense a 170-page complex bill into a few paragraphs, I’ll simply say the past six months have been, by far, the most stressful, challenging, and time-consuming of my almost 10 years in the Kentucky Legislature. Also they were, again by far, the most meaningful six months knowing that something had to be done to address the critical issue of our financially-failing retirement system.
It was a ticking bomb that had to be defused and that the Governor called us into Special Session to address this single issue and pass this single bill underscores that thought.
I’m pleased, to say the least, to report that after the shortest possible session — five days — the Kentucky General Assembly passed and sent to Governor Beshear a pension-reform bill Friday, which he immediately signed. When fully implemented, it will keep the state pension system solvent for current and future employees. However, keeping the system solvent is not a simple goal when you consider that it has over $26 billion in unfunded future retirement obligations. Those commitments, with the exception of annual cost of living increases, are protected by inviolable contracts with state workers and must be met — no exceptions. Without substantial reform, the system could have gone broke in as little as 14 years.
That is why we had to act now, before the new fiscal year begins on July 1, to pass a pension bill that begins to make meaningful, necessary corrections to fund the system.
Though House Bill 1 contains dozens of provisions, most of the attention was focused on a few major changes that mostly affect state and local government employees hired on or after Sept. 1, or those in the teachers’ retirement system hired on or after July 1.
Among them is a provision that would raise the required retirement age for the majority (non-hazardous) of future state and local government employees to 57 and require that an employee’s age and years of service total 87. This so-called “Rule of 87” is expected to save significant money for the pension system, which now allows those employees to retire at any age with 27 years of service.
The bill also includes medical coverage eligibility criteria changes for new employees, along with a requirement that future state and local employees in hazardous positions and new state police hires work 25 years — up from the current 20 — to retire with full benefits. Teachers who are hired as of July 1 must have five more years of service credit if they wish to retire at age 55 with reduced benefits, but there was no change to their retirement age for full benefits.
Other factors that will create long-term savings include new-hire requirements, like an additional one percent employee retirement contribution; lower benefit factors particularly in early years; and tightening rules regarding service purchases for retirement credit.
Another significant change will put in statute annual cost-of-living adjustments (COLAs) for current and future state, local and state police retirees at 1.5 percent, the same as it is for teachers in current law. While setting the COLA at a “floor” of 1.5 percent, we can, and hopefully will, still give higher COLAs but the legislature will be required to fund such increases from the General Fund.
The current practice of granting full inflation COLAs by taking the funds from the Retirement System, as we say “robbing Peter to pay Paul,” is a major cause of the current financial difficulties.
Most of us by now have heard the retirement term “double dipping,” which refers to a state retiree’s ability to return to work and collect not only a paycheck but start building a second pension. HB 1 does away with the second pension provision for all current and future employees and retirees. Returning retirees will not have to make retirement contributions, but employers will still be contributing. Another major change that will help bring our pension costs down to a more manageable level.
Regarding immediate savings, cities, counties and school districts will receive one-time savings of approximately $55 million this year in their employer contributions because of changes made by HB 1 and, in the long term, the state will save hundreds of millions of dollars per year.
We can also expect that, under the bill’s graduated employer payment schedule, by 2025 the state will meet 100 percent of its contribution obligations to the pension system. When that happens, unfunded liabilities will no longer exist.
While HB 1 is a large step, there is certainly more to be done on this issue, and plans for that work are already in motion. Much is expected from a working group created by the Governor to look into such issues as defined contribution plans, investment performance, governance of the pension system in the Executive Branch, and whether or not to move school system classified employees out of the city-county retirement systems. I serve on the working group subcommittee which will address this last issue.
What HB 1 will do for state government — and ultimately every taxpayer in the Commonwealth — is move us forward toward a viable pension fund that will meet our state’s needs for the foreseeable future. That in itself is a considerable accomplishment in just five days and shows what we can accomplish when acting together in a bi-partisan effort. This past week we proved that, at least for a while, a wave of bipartisanship infected Frankfort and that we can cast aside political differences to do the work of the people.
Before closing, I want to note that our state Senator Dorsey Ridley served as a Minority Democrat member of the Senate’s negotiating team. While we sat on different sides of the table, we were united in our goal and it was personally reassuring to have a strong friend there. Thanks, Dorsey.
