Kentucky lawmakers gaveled in Friday morning, kicking off a long-awaited special session on pensions for quasi-governmental agencies.
Regional universities and other quasi agencies’ pension contributions skyrocketed on July 1, jumping from 49% of every employee’s salary to 83% — the rate paid by over 200 other state agencies.
The massive increase in costs threatens to financially cripple organizations tasked with providing a range of social services, including county health departments, mental health clinics, rape crisis and domestic violence centers, if relief is not granted before their first contribution is due in August.
Thousands of midcareer employees who have paid into Kentucky’s pension system for 10 to 20 years, expecting a pension to fall back on when they retire, could lose over $100,000 each depending on the special session’s outcome, according to an analysis by the Kentucky Center for Economic Policy.
In a one-hour meeting Friday morning, representatives proposed three pension bills, gave them a first reading and sent them to the state government committee for a hearing before adjourning. That hearing is expected to take place Saturday after the House reconvenes at noon.
Gov. Matt Bevin’s special session proclamation is narrowly worded, so lawmakers will only be able to consider a bill with the specifications he outlined. House Speaker David Osborne said Friday that he, as speaker, has authority over the agenda and what bills are heard but still needs to follow the proclamation.
The Republican-sponsored bill — House Bill 1 — follows what Bevin outlines in his proclamation. House Bill 2 follows what Democrats proposed earlier this month. A third bill, also sponsored by the Democrats, consists solely of a one-year rate freeze for quasi agencies.
House Democratic Leader Rocky Adkins decried the proclamation saying it was “clearly a violation” of state law. Bevin should only have the power to call a special session and declare what issue will be addressed by lawmakers, not dictate the specifics of a bill, he said.
“The governor’s call completely crosses the line and makes a mockery of the legislative process,” Adkins said in a statement Thursday evening.
Adkins reiterated his sentiment Friday on the House floor, saying the move threatens the separation of powers. He thanked House Republicans for allowing multiple bills to be discussed.
Attorney General Andy Beshear said Friday in a statement:
House Republicans said former Gov. Steve Beshear once called a special session to deal with pensions with a more narrow scope than Bevin’s proclamation. Speaker Pro Tem David Meade asked lawmakers to stop the rhetoric and get to work.
Bevin’s proclamation requests lawmakers freeze the quasi agencies’ rate for a year, giving them until April 2020 to decide whether to buy out of the state pension plan or stay and pay the 83% rate. If they leave, they must provide some form of retirement plan for those employees.
If groups leave, they can pay their pension obligations in one lump sum or in installments over 30 years, beginning at the 49% rate that would increase 1.5% annually. They can keep their Tier 1 and 2 employees — employees with 10 to 20 years of experience — in the pension system if they pay additional costs.
If the agencies fall behind on payments, the employees who remain in the system would not accrue benefits until their employers pay, under the proposal. The Finance Cabinet would be able to freeze pension payments until the agency pays.
Bevin’s five-page proclamation says any bill that passes must be “nonseverable” — if courts strike down any part of it during a likely legal challenge, the entire statute would be void.
Jason Bailey, the executive director of KCEP, wrote in May that half the quasi agencies would not be able to pay off their pension obligation in 30 years under a similar proposal.
All of the options Bevin proposed create bad deals for those who want to keep their Tier 1 and 2 employees in the pension system, Bailey said then. Agencies would pay more to keep those employees on the pension system or reduce benefits by freezing pensions, potentially violating the “inviolable contract” promising pensions to those who pay into the system.
An alternative presented by the Democrats earlier this month calls for freezing the quasi contribution rate at around 49% until the pension plan’s debt is paid off. It also calls for more optimistic assumptions for investment returns, moving the assumption from 5.25% to 6%.
House Democratic Caucus Chairman Derrick Graham then said in a news release that their proposal is “faster, cheaper and stands on much stronger legal ground.” While preferred by KCEP and some public worker and retiree groups, Bevin dismissed the Democrats’ proposal, calling it “immoral.”
Lawmakers passed a pension relief bill during the regular legislative session — House Bill 358 — but Bevin vetoed the bill in April, saying he would call a special session for further discussion. Alongside incorrect dates and typos in the bill, Bevin objected to a part allowing the Finance Cabinet to take over any agencies that defaulted on pension contributions — potentially suspending pension payouts to retirees.
Bevin initially said the special session would happen before the quasi rate jumped July 1. It was unclear for months if he would get the votes to pass a bill in a special session. A separate pension-related special session in December concluded within 24 hours with no vote.
The quasi rate is a little under half of the state agency rate. Allowing them to leave at that discount would cost the already underfunded pension system roughly $800 million.
A mass exodus could put it at further risk due to having fewer people, especially younger workers, paying into the system. (All quasi employees hired after 2014 automatically went onto hybrid-cash retirement plans, not the standard defined contribution pension.) This could cause other contribution rates to rise.
After decades of a bipartisan failure to fully fund pensions, Kentucky has one of, if not the, worst-funded pension system in the country. KRS has about 12% of the funds it needs to cover its current pension obligations — it is underfunded by about $37 billion.
Around 9,000 employees — 6,700 of whom began before the 2014 retirement plan change and have pensions — across nearly 120 schools and agencies in KRS could be impacted. The Universities of Kentucky and Louisville have separate retirement plans and will not be impacted. Plans covering other groups, including teachers, also will not be impacted.
Some groups said they are cutting services since the rate increase. Some health departments feared they will need to close without a lower rate.
The General Assembly, both chambers of which adjourned before 9 a.m. on Friday, will reconvene Saturday at 8 a.m. They expect to be back Monday at 4 p.m., Tuesday at 2 p.m. and Wednesday at 9 a.m.
This post has been updated with links to the proposed legislation.
Follow Olivia Krauth on Twitter @oliviakrauth for live updates from Frankfort.