CERS Contribution Rates Approved as Renewed Call For Phase-In is Dismissed

Posted on December 7, 2017

     Calling the rates “a little too aggressive,” some Kentucky Retirement Systems (KRS) Board of Trustees members requested again Thursday that employer contribution rates for the County Employees Retirement System (CERS) be phased in. The requests were ignored, however, after Board Chairman John Farris told the group it was too late. In the end, the Board approved the new contribution rates for Fiscal Year 2019, meaning cities will see a big jump in pension payments if the legislature doesn’t act.

     The rates approved Thursday are 28.05 percent for CERS nonhazardous and 47.86 percent for hazardous. That’s up from the current Fiscal Year 2018 rates of 19.18 percent and 31.55 percent, respectively. The rate change means a $231 million increase for CERS nonhazardous and an $86 million increase in hazardous payments. It will result in a $108 million increase for Kentucky cities. (You can see a city-by-city analysis here.)

     Betty Pendergrass, a CERS representative on the Board, remarked the rates were “significantly higher than they need to be.” She referred to investment returns and payroll growth for CERS that were higher than anticipated. “I really think the CERS rates ought to be phased in over a five-year period,” she argued to the Board. “We can watch the investment returns, and if they take a nose dive, then we can revisit those contribution rates.”

     Board member Vince Lang agreed, indicating there seemed to be a consensus among several groups that a phase-in is needed. Still, Board Chairman John Farris notified the group it couldn’t be done. “I don’t see any way for us to go back, change things or do things in a different way,” he stated. Farris reported that legal counsel warned against such a move, citing KRS 61.565. KLC Deputy Executive Director J.D. Chaney says the statute quoted does not limit the phasing-in of assumption rates. “While the statute may raise concerns about the ability of the Board to phase-in the actuarially required contribution (ARC), state law does not forbid the phasing-in of assumption changes,” he pointed out.

     Farris told the Board it’s now up to the legislature to enact a phase-in of contribution rates. “The time for debate was earlier this year,” he said. He did, however, acknowledge that not phasing in the rates could have a serious detrimental impact on some local governments. “Hopefully the legislature can come up with some agreement on the phase-in of those rates, but statutorily we don’t have the power to do that.” He encouraged members of the Board who feel a phase-in is needed to contact their legislators.

     Chaney warned the Board back in July that drastic changes to the assumptions in the absence of an experience study and without phasing them in would result in substantially higher contribution rates that would be a major hit to local employers and would have an adverse impact on the long-term stability of CERS. A majority of the Board ignored the warning and set the rates at the July meeting. Chaney commented after the vote that he had “never seen any action by the state or any of its agencies that would be this disastrous for city governments.” (Read more about the July meeting here.)

     Thursday, there seemed to be an awareness of that impending possibility. Lang asked representatives of GRS, a national actuarial and benefits consulting firm that calculated the contribution rates, if it had ever recommended a phase-in. The response was that the company sees such a decision as a policy matter and that “it really puts increased pressure or emphasis on the General Assembly to take action.” Farris reminded the Board the rates approved Thursday were not set to take effect until July 1, 2018. “It gives the legislature opportunity, between January and July 1, to either do a phase-in or change it,” he responded. “Nothing is starting January 1, 2018.”

     The vote was unanimous to adopt the new employer contribution rates for the Kentucky Employees Retirement System (KERS) and the State Police Retirement System (SPRS). Three Board members voted “no” on the CERS rates: Betty Pendergrass, Vince Lang and Jerry Powell. Bryanna Carroll, KLC director of governmental affairs, is hopeful the legislature will step in to alleviate the financial crisis many cities could face. “It now seems obvious to more members of the KRS Board that these rates could destroy some city budgets,” she observed. “It’s a big reason why separation of CERS from KRS is so important. The state dictates CERS benefits, asset allocations, investments and assumption rates. It’s all under state control, and all we can do is pay the bill.”

     State Budget Director John Chilton couldn’t give members of the Board much of an update on the pension talks still ongoing in the legislature. “The flow of information and the bill are in the legislature’s hands,” he advised. Chilton did confirm substantial changes are expected to the original bill draft released in October. For now, he apprised the Board that no new bill draft has been finalized. Once it is, he said it would be sent to actuaries for scoring. “The governor feels a high level of urgency to have this considered by the legislature and to get it out of the way before the session,” Chilton said. Wednesday, various news reports indicated a majority of the House Republican Caucus signed a letter to Governor Bevin asking him to not call a special session and to address the pension bill in the Regular Session. The legislature convenes January 2, 2018.

     The Board of Trustees also heard a brief report on an audit conducted of Fiscal Year 2017. (You can read more on the report made to the Audit Committee on Monday here.) It also had a contentious debate about the legality of a resolution Board member Jerry Powell first introduced at the September meeting. The resolution called on Governor Bevin and legislators to honor and fulfill retirement benefits under the inviolable contract and to fund KERS and CERS at the actuarially recommended level. CERS employers have always paid 100 percent of what they were required to pay, but the state has not. Farris and legal counsel for the Board felt the resolution was out of the scope of responsibility for the Board. Members did vote on the measure, but it was defeated when it ended in a tie.