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Higdon: Judge’s decision on pension overhaul destined for state high court

By JIMMY HIGDON
14th District State Senator

Friday, July 6, 2018 — I have reviewed Judge Phillip Shepherd of the Franklin Circuit Court’s opinion that was released on June 20. I have respect for the judiciary, but I fully expect this opinion to be expedited straight to the Kentucky Supreme Court. The judge’s decision pertained to Senate Bill (SB) 151, but his ruling calls into question a number of bills passed last session. Most notable is the state budget and a bill capping the percentage of payments due by local governments on increased pension payments.

SEN. JIMMY HIGDON

While those bills have not been challenged yet, they were also passed through the committee substitute process just like SB 151. It also calls into question numerous bills passed in prior sessions.

I am not proud of the way SB 151 was passed. The legislative process can be compared to making sausage. Not always appetizing, but the end product can be good. This legislation does some very good things to assure the proper funding of all Kentucky retirement systems, especially the Kentucky Teachers’ Retirement System (KTRS or TRS).

Senate Bill 151 statutorily requires future sessions of the General Assembly to fully fund the ARC (actuarially required contribution) for TRS, which costs the state an additional $500 million a year above the statutory rate that has been paid in the past. It will also move TRS to level dollar funding, which is a different (and more efficient) payment method than the current one, which I will explain further on. According to TRS staff, level-dollar funding will add an additional $400 million in contributions to TRS every year. This will require the state to put more funding into the system in the near future, but unfunded liabilities will be paid off sooner, which will lower overall costs in the long run. Actuarial analyses for TRS show that this could eventually save the state up to $600 million per year in the future. We are committing to pay more money now so that the system is better off in the future.

Years ago, actuaries came up with a pension payment system for unfunded liabilities that artificially keeps unfunded liability payments low. Pension systems all across the country used this method, called percentage of payroll. But, by following these assumptions, pension systems all across America are underfunded by more than $6 trillion. This failed form of paying the ARC had to stop, and a realistic payment schedule needed to be put into place—called level dollar funding. Level dollar funding does not use unreliable assumptions that drive up liabilities when they are wrong, but rather commits to paying retirement liabilities in even installments over a fixed period of time.

A little history on pension reform in Kentucky takes us back to 2013 when Senate Bill 2 was passed. SB 2 moved all new state hires to a hybrid cash balance plan. A hybrid cash balance plan is like a 401(k), except it is guaranteed not to lose any money.

The most positive thing to come out of SB 2 is the requirement that future sessions of the Kentucky General Assembly pay the full ARC every year to the Kentucky Employees Retirement System (KERS). In 2014, the Kentucky General Assembly put $1 billion into KERS. In 2016, the General Assembly made its first ARC payment to KTRS and contributed $2.3 billion to pensions.

In this year’s budget, we went to level dollar payments with KERS and put a combined total of $3.4 billion into all Kentucky pensions. In our next budget, SB 151 commits us to an ARC with TRS and to fund level dollar payments. Total new pension contributions for the next budget are estimated to be $4.2 billion. Let’s review these increased contributions:

— 2014 increased contribution of $1 billion, or five percent, of our total budget.
— 2016 increased contributions to $2.3 billion, or 10 percent, of our budget.
— 2018 increased contributions to $3.4 billion, or 15 percent, of our budget.
— 2020 budget could see additional contributions increase to $4.2 billion, or 20 percent, of our budget.

It is a sobering thought that 20 percent of our budget will be going toward paying our pension unfunded liability.

Senate Bill 151 statutorily requires future sessions of the Kentucky General Assembly make a 100 percent ARC payment to TRS in the current budget, and then phase-in to the more conservative and accurate level dollar payment methodology. This is a huge commitment to our retirement systems and teachers. As I said earlier, the legislative process can be compared to making sausage. Not always appetizing but the end product can be good.

Judge Shepherd’s ruled SB 151 is unconstitutional because it was not read publicly three times. The House and Senate followed old established rules to pass this legislation. Our primary guidelines come from Mason’s Manual of Parliamentary Procedure. As Mason’s Manual Section 722 reads: Amendments, and even complete substitutes to a bill, do not require three readings.

Many other states have what is called an “Original Purpose Rule” in their constitutions. These provisions require that an amendment to legislation be germane to the original bill. Kentucky does not have such a provision in its constitution. The underlying purpose of the three readings requirement is to provide time for deliberation. The General Assemble deliberated on SB 1 for months, and SB 151 was essentially a reduced version of SB 1, with controversial provisions removed.

Probably more people watched this process with passage of SB 151 than ever before. Maybe it is time for an Original Purpose Rule to be added to our constitution. I am sure this and many other issues will be considered next session.

Senate Bill 151’s original title was “AN ACT relating to the local provision of wastewater services.” It was changed by a title amendment to “an act relating to retirement.” Contained in SB 151 is language that deals with retirement. Included in SB 151 is the following language: There is NO change to COLAs; it caps sick days as of January 1, 2019, which can be used toward increasing retirement benefits; and sets up a hybrid cash balance plan for new teacher hires (which is the same system all state employees have been hired into since 2014).

A recent memo sent out, detailing a study commissioned by the Kentucky Public Pension Coalition and the Kentucky Retired Teachers Association, indicates that if TRS averages anything close to the system’s projected 7.5 percent rate of return for the next 30 years, the cash balance retirement benefit would be better than our current defined benefit pension benefit for a 30-year employee.

I received some emails asking that I support the plan submitted by the education and state employees groups, also known as House Bill 539. After reading the “Shared Responsibility Plan,” as it was called, I had some concerns. In all the emails I received from teachers, five issues were loud and clear.

1. Don’t reduce any benefit covered by the inviolable contract.
2. Don’t make me pay more for retirement benefits.
3. Don’t make me work longer to retire.
4. Don’t reduce or suspend COLAs.
5. Don’t require local school districts to contribute two percent toward retirement.

When I read HB 539, the first two pages did exactly what teachers asked me not to do. The bill states if the plan drops below 95 percent funded, the retirement board can: Increase required contributions; reduce benefits; make you work longer; reduce or suspend COLAs; and require school districts to contribute two percent.

This has not been an easy issue. The easy thing would be to do nothing, but doing nothing was not an option. Also, I admit it was a tough session. We were willing to take on the tough issues and to pay our unfunded liability. If the Kentucky Supreme Court upholds Judge Shepherd’s ruling, the pension discussion will be back next session, which starts January 8, 2019.

As always, please do not hesitate to contact me. You can leave a message for me about this session or the upcoming interim session by logging onto the Legislative Research Commission’s (LRC) website at www.lrc.ky.gov or by calling the legislative message line at 800-372-7181. You can also contact me personally at my home at 270-692-6945 or email me at jimmy.higdon@lrc.ky.gov.

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