To be sure, the 2013 Regular Session beginning the first week of January will be all about state and local government pensions and how to keep the cost of those pensions under control.
Of all eight recommendations for pension reform made by the state’s Public Pensions task force last month, perhaps the one that would most impact future state hires is a proposed switch from the Kentucky Retirement Systems’ (KRS) current defined pension plan to a hybrid cash balance plan for all members of the retirement systems beginning in July 2013.
Cash balance plans are a hybrid (or blend) of a defined benefit plan (which guarantees a set annuity upon retirement) and a defined contribution plan (for which payouts are variable based on investment returns). In a cash balance plan, employees would be able to purchase an annuity based on the assets in their account. The current retirement age would remain the same, as would current death and disability benefits, but the proposed hybrid plan is considered less costly to the state and more portable for employees. There would be no cost of living adjustment increase (COLA) written into state law for retirees, or employees, to further reduce employer costs and help pay down pension obligations to current employees and retirees.
For the state and those agencies under the KRS, a proposal to fully fund the state’s actuarially required contribution (ARC) to the KRS beginning in fiscal year 2014 and proposed removal of the “inviolable contract” language from state law for future hires would likely have the greatest impact. A comment on the latter: The contractual language ensures all employees vested in the Kentucky Retirement Systems’ plans right now will receive a set pension at retirement. Under the hybrid cash balance plan, accrued benefits would be protected for new hires but could be changed, should the need arise.
Here are the eight recommendations, in short:
1. Phase-in of the actuarially required contribution (ARC) for KERS and SPRS. Require the state to pay the pension ARC in full starting fiscal year 2014 for both KERS and the State Police Retirement System, which is also under the KRS. Currently, full funding of the ARC is being phased in through 2025 for KERS non-hazardous, 2019 for KERS hazardous, and 2020 for SPRS.
2. Paying off unfunded liabilities (or unfunded obligations) in the KRS. The task force recommends giving the KRS a new 30-year period to pay off its unfunded liabilities (or unfunded current obligations) to provide some relief. The current schedule for paying off the obligations is 26 years, with the period reduced each year going forward.
3. Repeal the COLA for all employees/retirees.
4. Tighten the rules on reemployment at public agencies after retirement. Current rules require a three month break in employment before retirees in non-hazardous jobs can return to public employment with the state/other agencies in KRS. Reemployed retirees are not allowed a second retirement account. The proposed change would extend the employment break to two years (or one year for full-time hazardous plan retirees returning to full-time hazardous employment).
5. Changes proposed for pension “spiking”. Employers must now pay pension contributions on additional salary earned under current state law. If proposed rules are enacted, employers would be required to pay the cost of any salary increase above 10 percent annually given to current employees within the last five years.
6. Changing the composition of the Kentucky Retirement System Board. The task force proposed adding two members, making the current nine-member board an 11-member board that has five elected members, five members appointed by the governor, and a seat for the state Personnel Cabinet Secretary.
7. Transparency in information related to the state pension systems’ financial and actuarial condition. Today, there are various statutory requirements regarding transparency and posting of data online. The proposal would also require KRS to establish a web site with information that is easily available and understood by the public.
8. Plan changes. This recommendation covers the proposed change from defined benefit to hybrid cash balance, as explained earlier.
Some of you may be asking what changes were proposed for the legislative and judicial retirement plans that many of us have heard so much about. These two plans are administered by the Judicial Form Retirement System, or JFRS. Well, for one, both plans will be closed to new participants starting July 1, 2013, with new legislators and judges required as of that date to participate in KERS under the proposed hybrid plan. Second, retired legislators and judges would no longer receive an annual COLA on their retirement benefits.
Lawmakers may also consider approving a bond issue to pay down current unfunded pension obligations, or “unfunded liabilities”, in the pension system that total a combined $19.2 billion, but that has yet to be determined. I’ll share more with you next week.
Enjoy the holiday season, everyone.