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Dorsey Ridley: Kentucky’s pension system needs to be fixed, but latest draft legislation isn’t the answer

I’ve never seen anything like this.

The governor announces earlier this year that he is taking the politically courageous step of tackling Kentucky’s public pension challenges but then lets wild rumors ferment for months by not releasing a plan. When he does release his plan, it’s 505-pages long and on the eleventh hour on a Friday. And along the way, he creates fright and panic among current and retired public employees by having some Philadelphia consultants recommend draconian cuts to the pension plans.

As the son, brother and husband of retired teachers I cannot support the governor’s plan as written in draft legislation that was cobbled together in secret. Even the Speaker of the House now says he can’t support the current form of the draft legislation. I’m glad he has seen the light. There are too many unforeseen consequences for the 150,000 Kentuckians who receive more than $3.5 billion annually in benefits from state and local pension plans. Expenditures stemming from those pensions support about 33,700 jobs that pay about $1.5 billion in wages and salaries. That’s a total economic output of nearly $5 billion.

The draft legislation would place teachers and public employees hired after next July in 401(k)-type retirement plans, rather than traditional pensions, shifting the burden to them to save enough for their retirements, but offering employer matches of 6 to 9 percent of salary.

As I’ve written before, shifting public employees to a 401(k)-type retirement plan would not reduce the liabilities but will make the funding challenge worse. A switch would close the existing pension plans to new members, which would lower investment returns on the existing plans’ assets over time. That would increase the costs to pay down the unfunded liabilities – exactly the opposite of the goal I thought we were trying to achieve.

The draft legislation would reset the amortization period to 30 years. The longer the period, the more interest the state pays. I hear that 401(k)-type retirement plans should shorten our debt amortization. This provision does the opposite. This just kicks the can down the road – exactly what I thought the governor was trying to avoid.

One provision in the draft bill that raises a lot of concern would require teachers and public employees to contribute 3 percent more for retiree health care. Instead of the additional money being used to shore up the retiree health insurance funds, it would be used to offset the equivalent decrease in contributions from the government.

Let’s call it what it really is – a 3 percent pay cut. It would just shift the burden of funding retiree health care to the workers. I’ve heard the provision would cut wages by about $158 million annually for state workers (including teachers) and another $85 million for local workers, many of whom have not received raises for much of the last decade. For a teacher who spends 27 years in the classroom at present-day salaries, the 3 percent contribution would mean the loss of about $40,000 in lifetime income.

Among other concerns about the draft bill, retiree allowance payments will end if agencies under any of the pension umbrellas miss payments or become delinquent as contribution rates increase. That prompted a former Kentucky Retirement Systems trustee to call the draft bill a “bankruptcy bombshell” and question whether the phrasing could immediately take away pensions for social workers at a Louisville-area nonprofit that filed for bankruptcy in 2013.

And then there are questions about a part of the draft bill that would eliminate a requirement that school districts provide at least 10 paid sick days for teachers and other full-time school workers each year. That’s not to mention whether yet other provisions would make it difficult for school districts to tap retirees as substitute teachers.

As of writing, the draft of the bill hasn’t been pre-filed and the governor hasn’t followed through with a promise to call a special session despite the fact that time is drawing short. The holidays are fast approaching and the next regularly scheduled session begins on Jan. 2. That’s when we have to pass the next 24-month budget for the state.

As the governor, legislators and stakeholders continue to wrestle with the pension challenges, I encourage everyone to check out the draft of the bill. You can find it online at pensions.ky.gov under the heading “Pension Reform (Draft).” Look at the draft and other information on the website, and feel free to share with me your comments, concerns or questions. Good public policy is made only after a robust debate where all sides get a chance to voice their opinions. You may leave me a message by calling the toll-free Legislative Message Line at 800-372-7181. You can also e-mail me directly at Dorsey.Ridley@lrc.ky.gov.

Dorsey Ridley is the Senate Minority Caucus Chair representing District 4, including Caldwell, Crittenden, Henderson, Livingston, Union and Webster counties.


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