By RON SCOTT

Guest columnist

Public pension reform has been a hot topic of discussion locally and around Kentucky this past year, and will be a major issue again addressed by the 2018 Kentucky General Assembly.  The financial solvency of the pension programs for state workers (Kentucky Employees Retirement System – KERS) and for teachers (Kentucky Teachers’ Retirement System – KTRS) is perhaps the biggest challenge. The County Employees Retirement System (CERS), which covers city and county workers, is now the best funded of all Kentucky pension plans.  CERS is funded at 64% of ultimate cost, which is at a much higher level than the pension plans for state employees (about 20%) or teachers (about 30%).  Notwithstanding, the Kentucky Retirement System (KRS) Board of Trustees has advised all city and county governments participating in CERS of dramatic contribution rate increases, effective July 1, 2018. Those scheduled rate increases will result in a $231 million annual increased contribution for all participating local government employers for their CERS nonhazardous classification payroll and an annual increase for all participating local government employers of $86 million for their CERS hazardous classification payroll.  This new annual bill of $ 317 million (above what’s already required) will be devastating to all local governments and their ability to provide services if not modified by the 2018 Kentucky General Assembly and/or if no additional funding sources are provided to local governments.

The Governor and legislative leaders have indicated they will act in the upcoming legislative session to fund all of their pension obligations, as required by the “inviolable contract” provisions of state law and otherwise. “Keeping the Promise” of meeting pension obligations is admirable. Finding the revenue required to do so will not be easy, be it for state or local governments.  The state may need to increase state revenues to meet their obligations.  “Fiscal fair play” would at a minimum require the state enact legislation to clarify that all cities will have the same authority to raise revenue (which is currently not the case) to provide local services and to meet their obligations.   Granting additional revenue authority to local governments is also needed.

But, does the CERS need to be again reformed?  Public pension reforms have been implemented by the Kentucky General Assembly in prior years, most notably with passage of SB 2 during the 2013 Regular Legislative Session.   A recent major independent actuarial study concluded that the CERS was currently well funded, that it was on a path toward being fully funded, and because the reforms implemented by SB 2 have not had time to take effect, it would be premature to enact further reforms to the CERS so closely following the 2013 reform.   

SB 2 significantly “reformed” the City and County Retirement System (CERS).  It did so by prohibiting new city and county government workers hired after January 1, 2014 from enrolling in the existing hazardous or non-hazardous retirement programs mandated by state law for current city and county employees, where benefits were formula-based and guaranteed to be provided to retirees for life.  The CERS is now a closed system, not open to employees hired after January 1, 2014.   Under all CERS plans, the funding is paid by city and county governments and by their employees.  There is no state funding of any of these plans, although the pension plans are mandated by state law.  

SB 2 required all new city and county government workers hired after January 1, 2014 to be enrolled in a defined contribution plan called a hybrid cash balance plan, where future benefits would be based upon contributions and earnings (less administrative expense) and under which unfunded liabilities could only occur if investment earnings over time were less than the 4% annual earnings promised. All  employers participating in CERS are required to make the same percentage contributions for all employees, irrespective of whether the employee participates in a hybrid cash balance plan or a defined benefit pension plan.  

CERS represents over 70% of total assets held by KERS for all pension plans it governs.  The structural  composition of the KERS Board  (to achieve greater proportional representation of the various pension funds it governs) and its administrative decisions (rate decisions, investment processes, allocation of expenses among funds) should be annually reviewed by the Kentucky General Assembly and addressed legislatively if deemed appropriate.

It’s noteworthy that the fiscal impact analysis of SB 2, upon which legislators relied when passing the reforms to CERS in 2013, advised that the fiscal impact of SB 2 on local governments who participate in CERS would be a significant savings.  That fiscal impact analysis, based upon an actuarial report, advised that local governments participating in CERS would see a steady decline in their required contribution rates for both hazardous and non-hazardous employees over the next 20 years, beginning in fiscal year 2015.

That anticipated decline in required CERS employer contribution rates has not occurred.  Instead, dramatic increases have been imposed by the KERS Board on required future contributions by employers for both their hazardous and nonhazardous employees. …which as currently proposed, total over $317 million in new annual contributions that all city and county employers in CERS must make.   For the continued financial well-being of local governments and their ability to provide local services, and also for the long-term stability of CERS, it is vital that the 2018 Kentucky General Assembly enact legislation to phase-in the CERS increased contributions being administratively imposed by the KRS Board.   

The CERS was significantly reformed, effective January 1, 2014, and is on an upward path toward full solvency without dramatic contribution increases.   It is now the best funded of all of the state mandated pension plans.  In making efforts to cure all of the state’s pension problems, let’s not over-medicate the CERS patient.  Requiring the appropriate contribution rates, on time and over time, is the best course of treatment.

Ron Scott is city manager for the City of Danville.