Gov. Matt Bevin signed a bill into law Wednesday afternoon to give quasi-governmental agencies relief from soaring pension costs.
House Bill 1, which Bevin’s office crafted, passed by a 27-11 vote in the Senate Wednesday. Every Senate Democrat and two Republicans voted against it. The House passed the bill Monday by a narrow margin of 52-46, nine Republicans voted against the bill in the House.
Rep. Kathy Hinkle and Sen. Robin Webb, Carter County’s Democrat representatives, both voted against the bill.
“This bill doesn’t by any stretch resolve the pension crisis in Kentucky … but it is a remarkably responsible and appropriate next step in moving toward financial solvency,” Bevin said before signing the bill in the Capitol rotunda, according to the Courier Journal.
Signage of the pension bill comes after six days of a special legislative session that Bevin called.
Quasi-governmental agencies include health departments, rape crisis centers, mental health centers, and domestic violence shelters. Public universities across the Commonwealth, such as neighboring Morehead State University, will also be given temporary relief from increased pension contributions.
Many agencies have said they would face insolvency and be forced to shut down if relief did not come.
The law freezes the pension contribution rate of the quasi agencies to 49 percent of their payroll costs for the remainder of the fiscal year, which was the rate last year before spiking to 83 percent July 1.
Here’s how HB 1 will work according to the Legislative Research Commission
HB 1 would extend the one-year freeze on employer retirement contribution rates for quasi-governmental agencies in the Kentucky Retirement System non-hazardous plan into fiscal year 2019-2020 while giving agencies the choice to remain in the KRS plan or to voluntarily leave the plan.
Agencies would have between April 1, 2020 and May 1, 2020 to file a resolution stating their intention to stop participating in the plan. Agencies that choose to leave KRS would be required to set up a new defined-contribution, 401(k)-type retirement plan for their employees and pay their unfunded liabilities to KRS.
Agencies that remain in KRS would have to pay the full actuarial cost of that decision as determined by system actuaries in accordance with HB 1. Agencies could also allow current defined-benefit employees hired before 2014 to remain in KRS by paying the full actuarial cost.
Employees now in the KRS nonhazardous defined-benefit plan who are moved to a new plan would retain their earned benefits, but would not be eligible for a defined-benefit plan under HB 1.
House Bill 1 also includes a provision where the entire statute would be voided if any portion of the bill was struck down in a legal challenge, meaning the higher contribution rate for those agencies would go back up to 83 percent.
The actuarial analysis of the bill also notes how other agencies in the state pension system may lobby the legislature for the right to freeze their employees’ pensions and exit the system, creating a risk for remaining people in the system. The analysis also found the bill would short KRS $827 million in employer payment.
The cost of implementing HB 1 is projected to potentially be $58.5 million in fiscal year 2021 and $110.5 million in fiscal year 2022, according to a fiscal note attached to HB 1. Included in the cost is the rate freeze, the employer cost to leave the KRS plan, and continued state General Fund appropriations of around $50.2 million per year.
Democrats have criticized the bill as allowing agencies to kick employees off their pension plan and creating a possible violation of their inviolable contract, which could be challenged in court.
House Democrats unveiled two pension plans of their own at the beginning of the special session. Both would have frozen the pension contributions for the remaining fiscal year and redirect retiree health insurance payments for five years to the lower-funded pension side of those KRS plans.
On the Senate floor, Webb proposed an amendment to freeze the pension contribution rates for regional universities and the quasi agencies for another year, according to WFPL reporter Ryland Barton on Twitter.
Webb said the agencies were asking for relief because they felt they were in a “hostage situation,” but her amendment was voted down.
She also criticized 401(k)s and said the state is shifting more risk to the workers. Additionally, she echoed sentiments put forth by other Democrats: that the state was looking to do away with public pension plans.
“There’s ideology out there that people don’t need public pensions,” she said. “Be honest. If that’s how you feel, be honest.”
Webb also spoke out against Bevin’s tightly called proclamation for the special session, which required the legislature only consider Bevin’s pension plan. The proclamation also drew ire by Attorney General Andy Beshear (who is running against Bevin in November’s general election) who argued it unconstitutionally restricted the legislature’s powers.
“What’s happened to the independent thought process of this body,” Webb questioned on the Senate floor.
The state’s unfunded pension liabilities total $43.3 billion. Some of this can be explained because the General Assembly didn’t appropriate money to the fund nor did multiple governors request it, risky investments made by the KRS board and a flawed funding approach. All of which is to say, there’s no one single reason that accounts for the unfunded pension liabilities.
The Legislative Research Commission estimates a special legislative session costs taxpayers about $66,000 a day from the day lawmakers convene through the day they adjourn. This session spanned six days, resulting in an estimated cost of about $396,000, according to the Courier.