Without a freeze in pension contribution rates, 42 county health departments will close in the next year, and 22 more will close in the year following that, the Kentucky Health Departments Association warns. | Courtesy of Kentucky Health Departments Association

By Linda Blackford and Daniel Desrochers | Lexington Herald-Leader

Kentucky lawmakers believe they’ve found a way for regional universities and quasi-governmental agencies like health departments to ease some of the financial burdens posed by an overwhelmed state pension system, but they acknowledge it will still cause pain.

House Bill 358 would allow regional universities to opt out of the Kentucky Employees Retirement System. New legislative developments would add quasi-governmental agencies because both groups are facing crushing financial costs as lawmakers try to steady the overburdened state pension system.

But the requirements for quasi-governmental agencies are much tougher: those employees would have their benefits frozen. It’s possible the agencies could opt back into the state system, but more likely, they would be moved to a defined contribution plan instead.

Jason Bailey

Jason Bailey of the Kentucky Center for Economic Policy said he thinks this portion of the new legislation would be challenged in court because it breaks the “inviolable contract” of the state pension system.

“The bill breaks the pension promise to many of the 9,075 employees currently serving at quasi-governmental agencies,” he wrote in a policy paper on Tuesday. “And it lowers benefits moving forward. Because of inefficiencies, it costs 42 percent to 93 percent more for a defined contribution plan to provide the same level of retirement benefit as a defined benefit plan.

“So an employee who has 20 years in the system will no longer be able to earn benefits toward their pension during the point in their career when the most value is added,” Bailey wrote. “That change is clearly at odds with the inviolable contract.”

Allowing more agencies to leave will no doubt increase one actuarial analysis that predicted a $121 million cost to KERS if the regional schools leave.

“It’ll be worse, no doubt,” said Sen. Chris McDaniel, R-Taylor Mill, who has crafted various committee substitutes to current bills that would allow employees in the college systems to create defined contribution systems of their own and opt out of the Kentucky Employment Retirement System. “Allowing the ‘quasis’ to do this puts a lot of burden onto the retirement system and we will have to overcome that with general funds, there’s no two ways about it.”

Under McDaniel’s committee substitute to House Bill 358, some employees of universities could choose to stay in the system, even if that school decides to opt out of the system for all future employees. Quasi-governmental agency employees would be bound by the agency’s decision. The committee substitute passed out of committee Monday and could be headed to the Senate floor.

The bill would affect all local and district health departments, mental health/mental retardation boards, state-administered retirement systems, domestic violence shelters, rape crisis centers and child advocacy centers. The affected schools are Eastern Kentucky University, Kentucky State University, Morehead State University, Murray State University, Northern Kentucky University, Western Kentucky University, the Kentucky Community Technical College System, and the Kentucky Higher Education Student Loan Corporation. The University of Kentucky and the University of Louisville operate their own defined contribution systems.

If they choose to opt out, all the schools and agencies would have to create their own defined contribution system, as opposed to a defined benefit system.

At most state universities, faculty have chosen to be in the Teachers Retirement System of Kentucky, which is in much better financial health than KERS. TRS has about 57.7 percent of the money it needs to provide promised pensions, compared to 16 percent for KERS. Many university staff employees and quasi-governmental agency employees belong to KERS. Because the system is so underfunded, participating employers must pay increasingly large sums of money to keep it afloat.

Under McDaniel’s proposal, the schools and agencies would have to pay for an actuarial analysis that would compute how much it would cost to exit the state system. If they chose to do so, they could pay the cost in installments that would increase 1.5 percent each year until it’s paid off. Interest on the debt would be 5.25 percent a year for pension costs and 6.25 percent per year for retiree health costs.

University employees could choose whether to say in the state system; quasi-governmental agency employees would have to do whatever was decided by the agency itself.

“This is the best of the worst options,” McDaniel said. “Because there are no good options.”

Jim Carroll, spokesman for Kentucky Government Retirees, a Facebook advocacy group, worries that allowing the agencies to leave will require more financial help from the general fund to shore up the pension system.

“Create tax revenue. That’s the solution,” Carroll said. ‘You did it last time, do it again. Is it unpopular? Sure.”

“Pensions are already a huge part, relatively speaking, of the general fund, this is going to make it worse,” he added. “I think there should be a solution but it isn’t to underfund the system and to pass it on to other agencies.”

But McDaniel and other Republicans believe that allowing an exit ramp for KERS employees is the only thing that will keep crucial government services going.

“It’s the constant balance between do you want to keep these folks in operation or not?” McDaniel said. “And we do. We want to see them continue to operate. The fact is they can’t pay what they owe. So we need to find a mechanism to allow them out, to pay as much as they can, recognizing they provide critical services while still protecting the commonwealth as best we can.”