Lawmakers Warned of Increased Pension Costs Resulting From July Rate Changes

Posted on December 19, 2017

     Information provided Monday at the last Public Pension Oversight Board (PPOB) meeting of the year showed in greater detail the gap between the health of the Kentucky Employees Retirement System (KERS) and the County Employees Retirement System (CERS). Members of the Legislative Research Commission (LRC) provided an update on the 2017 actuarial and financial status of all public pension systems in Kentucky. The Kentucky Retirement Systems (KRS) Board of Trustees voted in July to change assumption rates for the three pension systems it manages. Monday’s report reiterated the drastic impact those changes will have on the funding status of CERS and employer contribution rates.

     Its funding dropped to 52.8 percent while the unfunded liability for CERS grew to $6 billion. Senior Legislative Committee Analyst Bo Cracraft told members of the Committee that drop was “due entirely to assumption changes.” Senator Joe Bowen (R-Owensboro), who co-chairs the Committee, stressed those revisions were made by the KRS Board of Trustees and not by legislators.

     In reviewing the CERS actuarial data, LRC staffer Brad Gross pointed out, “We’ve seen the CERS fund, which was around 157 percent funded — around $2 billion surplus back in 2000 — certainly has grown over the course of time to where we’ve seen roughly about an $8 billion swing over that time on the pension side.” Still, management and investment decisions, as well as the recession of 2008 and 2009, resulted in the funding situation CERS now faces. Gross did point out that CERS is not in the same crisis as KERS. “They are certainly better funded than the KERS nonhazardous funds,” he stated. Cracraft commented that the difference between the two is that KERS assets are declining while CERS assets are growing.

     Gross provided members of PPOB a view of how the assumption rate changes made this summer will impact cities and other CERS employers. “Based upon a change in the assumed rate of return, from 7.5 to 6.25 (percent), and the payroll growth going from 4 percent to 2 percent, you can see that ARC (actuarially required contribution) going up from 19.18 percent to 28.05 percent for your local governments beginning July 1, 2018,” he told members of the Board while directing them to a chart showing CERS nonhazardous employer rates from 2001 to 2019. Gross also stressed the CERS ARC is not paid by any direct appropriation in the state budget.

     The Kentucky League of Cities is continuing to advocate for phasing in the increased assumption rates. KLC Deputy Executive Director J.D. Chaney told the KRS Board when it passed the new rates 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.

     During Monday’s meeting, Gross showed members of the Board how much those increased contribution rates will cost local governments; that information was released earlier this month when the KRS Board of Trustees approved employer contribution rates for KERS, CERS and the State Police Retirement System (SPRS). CERS nonhazardous employers will have a $231 million increase, and the bill will jump $86 million for employers in the CERS hazardous plan.

     Monday’s testimony also included details on the increased expense KERS will have for the state. Assumption rate changes passed in July by the KRS Board means the ARC the state must pay to fund the KERS nonhazardous pension will jump from $844 million in Fiscal Year 2018 to $1.292 billion in Fiscal Year 2019. Roughly half of the ARC payment comes from the state’s general fund. The LRC report also detailed extra money the Teachers Retirement System (TRS) is requesting from the state: $553.6 million in Fiscal Year 2019 and $538.3 million in Fiscal Year 2020.

     Members of the Public Pension Oversight Board also approved recommendations for the 2018 legislative session — something it’s statutorily required to submit every year. Senator Bowen informed the audience the Board was submitting updated versions of recommendations that were not acted on in 2017. Those include:

1. A TRS housekeeping bill;
2. Legislation to eliminate the option for legislator retirement spiking from salaries earned through other forms of public employment;
3. Evaluation of findings and recommendations of the PFM Group’s performance audit and the adoption of a financially sound approach to address funding issues with the state-administered systems;
4. Support of measures that provide additional funds to improve the financial health and cash flow within KERS nonhazardous and SPRS funds; and
5. Support of measures that provide additional funds for the financial health of TRS and provide a long-term plan to pay the ARC.

     After the meeting Senator Bowen acknowledged pension reform legislation will have to be taken up in the 2018 Regular Session. He indicated the Senate has made progress. “We’ve got what we think is good language, comprehensive language, language in the bill that considers most of the requests made by those folks who are going to be impacted by the legislation most directly. We’ve got a good bill draft.” He stressed the Senate has listened to stakeholders and made modifications based on the feedback it’s received. He said conversations are underway to determine if the House or Senate will file the official bill.

     The Kentucky League of Cities is seeking separation of CERS from KRS in any pension reform bill draft. KLC Director of Governmental Affairs Bryanna Carroll stressed CERS stakeholders now have a disproportionate representation when it comes to decisions that impact the funding status of their pension system. “The state dictates CERS benefits, asset allocations, investments and assumption rates, and we’ve seen the impact those decisions are now having on local pensions and local budgets.” She stressed separation will lead to local control of local pensions. “It’s all currently under state control, and local governments are left with no action expect to pay the bill.”