FRANKFORT, KY ( July 24, 2019)—Five options for over 100 quasi-governmental agencies in Kentucky to get a handle on their rising pension costs have passed the Kentucky General Assembly in a five-day special session.
Senate President Robert Stivers II, R-Manchester, signs House Bill 1, a bill relating to the Kentucky Employees Retirement System,
after it was passed by the Senate and returned from the House.
The options found in House Bill 1 would allow the state’s approximately 118 quasi-governmental agencies—including local health departments, regional state-supported universities and community colleges, domestic violence shelters and others—to keep their employees in the Kentucky Employees Retirement Systems (KERS) nonhazardous plan at increased costs, or move all or a portion of their employees to an alternative retirement program. Agencies that leave KERS would have to pay their unfunded liabilities, which are earned but yet-unfunded benefits, in either a lump sum or in installments.
The bill was approved on a 27-11 vote in the Senate today after passing the House by a vote of 52-46 on Monday. It is expected to be signed into law by Gov. Matt Bevin in the State Capitol Rotunda at 2 p.m. this afternoon.
HB 1 sponsor Rep. James Tipton, R-Taylorsville, said during Monday’s House floor debate on HB 1 that Kentucky’s quasi-governmental agencies provide essential services that are at financial risk without passage of the legislation. He said the KERS nonhazardous plan currently has only 12.9 percent of the funds it needs to pay future benefits.
“And, while legally these quasi entities have a legal obligation to pay … we understand the difficulties they have and the problems that might arise without passage of legislation that might provide them some relief,” Tipton told the House.
Sen. Christian McDaniel, R-Taylor Mill, who is chair of the Senate Appropriations & Revenue Committee, also spoke in support of the bill.
“House Bill 1 addresses the issues confronting some of the agencies that provide critical services on behalf of the commonwealth in every community in our state, be it regional universities, public health departments, rape crisis centers, mental health agencies. They all provide services that are the foundation or safety net for so many in our society.”
“If we want to continue to have a great university system, if we want to continue to have social service safety nets ... these are the actions we must take at this particular time in history,” McDaniel said.
The cost of implementing HB 1 is projected to potentially be $58.5 million in fiscal year 2021 and $110.5 million in fiscal year 2022, according to a fiscal note attached to HB 1. Included in the cost is the rate freeze, the employer cost to leave the KERS plan, and continued state General Fund appropriations of around $50.2 million per year.
HB 1 would work by extending the one-year freeze on employer retirement contribution rates for quasi-governmental agencies in the KERS non-hazardous plan into fiscal year 2019-2020 while giving agencies the choice to remain in the KERS plan or to voluntarily leave the plan as of that date. Agencies would have between April 1, 2020 and May 1, 2020 to file a resolution stating their intention to stop participating in plan.
Agencies that choose to leave the KERS nonhazardous plan would be required to set up a new defined-contribution, 401(k)-type retirement plan for their employees and pay their unfunded liabilities to KERS. Agencies that remain in KERS would have to pay the full actuarial cost of that decision as determined by system actuaries in accordance with HB 1. Agencies could also allow current defined-benefit employees hired before 2014 to remain in KERS by paying the full actuarial cost.
Employees now in the KERS nonhazardous defined-benefit plan who are moved to a new plan would retain their earned benefits, but would not be eligible for a defined-benefit plan under HB 1.
Tipton credited a 2015 law allowing certain quasi-governmental employers in KERS and CERS to be voluntarily or involuntarily removed from the state pension system as the basis for HB 1. That legislation, 2015 HB 62 sponsored by then-State Rep. Brent Yonts, D-Greenville, requires employers to pay their unfunded liabilities to the system by lump sum or installments.
Unlike the 2015 law, HB 1 would not impact CERS and includes some other differences.
House State Government Committee Chair Jerry Miller, R-Louisville, told the House before it voted on the bill that HB 1 “gives options to avoid layoffs, to avoid bankruptcies.” He challenged an assertion made by some opponents to HB 1 that the bill violates what is known as the “inviolable contract”— language in state law that many say guarantees public pension benefits earned.
Miller said officials with the Kentucky Retirement Systems did not see HB 62 as a violation of the inviolable contract at the time of that bill’s passage in 2015.
“What’s the difference between 2015 and now? Ask yourselves that,” Miller told the House. “We have to take action… It’s time to take action to solve things.”
House Minority Caucus Chair Derrick Graham, D-Frankfort, who voted against HB 1, said 2015 HB 62 was a response to a federal bankruptcy ruling in the case of Seven Counties Services, a Louisville-based community mental health center that was allowed to withdraw from the state pension system after the agency filed bankruptcy.
Floor amendments proposed to the bill in both the House and Senate were defeated before the final votes on the bill were taken in both chambers.
Rep. Joe Graviss, D-Versailles, who filed HB 2 as an alternative bill this special session, said his bill—defeated by a vote of the House State Government Committee last Saturday—was more actuarially sound. He also challenged a nonseverability clause in HB 1 requiring that the legislation be voided if any of provision in the bill is found unconstitutional or unenforceable. He called the clause “throwing the baby out with the bath water.”
Also proposed but voted down in committee was HB 3, sponsored by Rep. Angie Hatton, D-Whitesburg. Hatton’s proposal had the singular goal of enacting a retroactive one-year freeze on employer contribution rates for quasi-governmental agencies and regional state universities and colleges to serve as what she called “insurance” in case other legislation considered this special session hits a roadblock.
Both Graviss and Hatton were among those in the House voting against HB 1. Among those voting against the bill in the Senate was Minority Floor Leader Sen. Morgan McGarvey, D-Louisville.
“We didn’t want to come in here and just gavel out. In fact, we wanted to come in here and take the time to pass a bill that wouldn’t generate the type of debate we saw today and instead have more unanimous, broad support because we do care about our workers. We do care about our institutions. We care about their jobs and the stability of the entire system,” McGarvey said on the Senate floor.
The week’s special session was not unexpected. The governor indicated that he would call a special session on quasi-governmental pension reform when he vetoed 2019 HB 358, legislation passed in the final hours of the 2019 Regular Session to address the quasi-governmental pension crunch.
HB 1 includes an emergency clause, requiring that it take effect immediately after it is signed into law by the governor.
