Digging Kentucky’s three major public pension systems out of what they estimate is at least a $33 billion hole will require the state to find an additional $1 billion per year, says State Budget Director John Chilton. On Monday, consultant PFM presented the Public Pension Oversight Board with a plan that finds $1 billion in the form of slimmed-down pension systems.
“The options before you are difficult and unpleasant and hard,” PFM Managing Director Mike Nadol said before presenting “recommended options” that included eliminating “the portion of any pension benefit payments resulting from COLAs (cost-of-living adjustments) granted between 1996-2012” for state and local non-hazardous workers.
Other recommended reductions included raising the retirement age to 60 (or to 55 for so-called Tier 1 employees hired before Sept. 1, 2008) for hazardous employees such as police and firefighters and to 65 for teachers.
Consultants also recommended nixing the ability for teachers and non-hazardous employees to cash in sick days for increased pension benefits and suspending cost-of-living payments to teachers until the Kentucky Teachers’ Retirement System reaches a 90 percent funding level. KTRS is currently 54.6 percent funded, according to Chilton.
For future hires, PFM recommended providing a 401(k)-style retirement benefit for non-hazardous employees, retaining the current system for hazardous employees — except for raising the retirement age to 60 — and shifting KTRS to a combination of a 401(k)-style “defined contribution” plan and Social Security. Kentucky public school teachers do not currently pay into Social Security.
In its report, PFM says the “strong action” is required to reduce the risks of crowding out other vital public spending while “keeping the state’s taxes at a competitive level,” of resorting to a “pay-as-you-go” basis which could quickly become “fiscally unsustainable” and of becoming insolvent, thereby “jeopardizing the retirement security of tens of thousands of former state and local government workers.”
PFM’s recommendations are non-binding. Any pension changes must be approved by the General Assembly, which is expected to convene in a special session this fall.
During a Facebook Live chat Monday evening, Gov. Matt Bevin, who in a statement described the PFM report as further confirmation of “the need for urgency” to get Kentucky’s “financial house in order,” responded to the question of whether the state would raise taxes to pay for the pension shortfall by saying, “Not if I can help it.”
Chilton’s suggestion that the PFM report would not “create a rush for the door” in the form of early retirements was met with laughter in a main room crowded with police officers and other hazardous employees.
Indeed, Frankfort Police Chief Jeff Abrams announced his retirement at the Frankfort City Commission meeting shortly after seeing PFM’s presentation.
“I don’t know that this will be what pension reform will look like,” Abrams told The State Journal. “At this point, I’m not willing to take the chance.”
Abrams, 43, had been aiming to retire in 2019, but he feared not being able to receive benefits for another 10 years if the retirement age is moved up to 55.
“We’re already seeing people retiring all over,” Franklin County Sheriff Pat Melton told The State Journal before Abrams’ announcement. Melton said raising the retirement age for hazardous employees would also create a liability for his office given the physically and mentally taxing nature of police work.
Franklin County Schools Superintendent Mark Kopp had a similar warning.
“If there are big changes, there could be a mass exodus,” said Kopp, noting that it is already difficult to recruit teachers, especially for math and science.
Kopp also took exception to Bevin’s suggestion last week that some state employees “hoard” unused sick days to increase pension benefits.
“People in our profession have a strong work ethic,” said Kopp. “That was, in all honesty, kind of a cheap shot.”
“The comments and suggestions made were very drastic, which were expected, but still extreme in our opinion,” Kentucky Education Association President Stephanie Winkler told The State Journal. “And these kinds of recommendations are not going to do anything to attract and retain educators for public schools, which is what our kids need.”
The matter of how PFM decided which benefits were considered guaranteed by Kentucky’s “inviolable contract” protecting government workers is absent from its report, PPOB member J. Michael Brown noted during PFM’s presentation.
“Is that analysis available to us?” Brown asked PFM’s Nadol, who referred him to the state.
“Thank you, sir,” said Brown. “I’ll take that as a no.”