Kentucky pension reform: Bevin proposal would move workers to 401(k)-like plans

Editor's note: Jim Carroll's comments have been updated to say that he appreciates the effort to respect the contractual rights of retirees.

FRANKFORT, Ky. – After months of planning and closed-door negotiations, Gov. Matt Bevin and GOP legislative leaders on Wednesday released a plan that they say begins to tackle Kentucky’s multibillion-dollar pension debt while honoring promises to retirees and public employees.

As expected, the plan calls for transitioning most public employees from traditional pension plans to 401(k)-like plans – but it does so in a much more gradual way than recommended by the Bevin administration’s pension consultant.

The plan protects the benefits of current retirees, Bevin said, and fulfills "promises that have been made to our public employees."

But it cuts benefits of current employees and teachers in some ways. And many leaders of employee and retiree groups raised the prospect that if the changes become law they would be challenged in court — particularly over a plan that would move current teachers and most public employees into 401(k)-type plans after 27 years of service.

"The bottom line is this plan will cost taxpayers significantly more money each year and we'll have reduced benefits for teachers, so why would any Kentuckian want the legislature to approve that?" said Brent McKim, president of the Jefferson County Teachers Association.

But at a news conference where he unveiled the plan with House Speaker Jeff Hoover and Senate President Robert Stivers at his side, Bevin said the plan protects all employee contractural rights.

Moreover, the governor said the plan addresses the financial crisis in a way that stabilizes the pension system and assures retirement benefits can be paid into the future.

"If you are a retiree, if you are working to be a retiree at some point, you should be rejoicing,” Bevin said. “... It guarantees by law that your pension is going to be funded. There will be no more kicking of the can down the road.”

The plan does not slash benefits of current retirees in ways recommended two months ago by the pension consultant to the Bevin administration.

It does not raise the retirement age for full benefits, for instance, and it does not call for immediately moving most current public employees into 401(k)-like savings plans.

Most new workers and teachers would go into 401(k)-like plans. But current employees and teachers would continue to draw their current pensions until completing 27 years of work, when those benefits would stop and additional benefits would be accrued under the 401(k)-type plans.

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And in an effort to avoid a flood of retirements, teachers with 27 years of service or more as of next July 1 would be given an option of remaining in their current traditional pension plans for three additional years.

Bevin also said he believes that the terms of the 401(k) plans that will be offered to employees and teachers are generous. “It will be a very good plan," he said.

One group of employees who would not be transferred to the 401(k)-like plans are those in “hazardous duty” jobs, such as police officers and firefighters. And one category of workers whose benefits will be slashed are state legislators, who enjoy certain benefit enhancements that will be rolled back retroactively.

But the plan is sprinkled with changes that triggered immediate concerns among public employees. One would suspend for five years cost-of-living benefit increases paid to retired teachers, and another would require all public employees and teachers to begin paying 3 percent more next year for their health care benefits

And the change that may most immediately be noticed by the public is one that shifts the way Kentucky funds pensions so that the state pays a set amount each year to assure it more quickly pays off the massive pension debts.

This approach will require that taxpayer funding for pensions increases by "hundreds of millions" of dollars starting next year. The Bevin administration had no more precise estimate of how much more money will be needed next year.

Nor did the administration have an immediate estimate Wednesday on how much its proposed pension changes will save Kentuckians in the long run.

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Bevin has said several times this year that he would call a special legislative session in 2017 for lawmakers to pass a plan to set the state on course to pay off pension debts. Those debts are officially listed at more than $40 billion, but Bevin estimates them at more than $64 billion.

Bevin did not say when that session will begin.

“As soon as we are ready,” he said when asked when he will call the session. “There’s still a little ‘I’ dotting and ‘T’ crossing” before that announcement, Bevin said.

State Rep. Jason Nemes, R-Louisville, was initially optimistic about the bill's chances. "I think it's a good plan. It's time to talk with voters about it."

House Minority Leader Rocky Adkins, D-Sandy Hook, said, "We have lots of questions and concerns. ... It's hard to predict what its chances will be because all we have now is a plan, not the actual legislation that will be filed."

Jim Carroll, president of the advocacy group Kentucky Government Retirees, said he appreciated the effort to respect the contractual rights of retirees but said he believes it would be illegal to “arbitrarily” reduce an employee’s pension benefits after 27 years.

Carroll also said that the toughest decisions now must be made during the 2018 regular legislative session, when lawmakers must find the money for the new approach to funding pensions.

“We’re going to need to hear from leadership how they’re going to come up with the money,” Carroll said.

Reporter Tom Loftus can be reached at 502-875-5136 or tloftus@courier-journal.com.