House Passes Pension Reform

This week in Frankfort, the House of Representatives passed pension reform legislation both to protect and allow for future solvency of the public pension program.  Following are highlights of this legislation:

· It DEDICATES recurring funding to help the state pay off the long-term liability of our public pensions.

·It DOES NOT require any increase in taxes.

·It DOES NOT change the law to expand gaming.

·It DOES NOT lower any retirement benefits for current employees and retirees.

·It MAINTAINS a viable defined-benefit retirement plan for future employees.

 Revenue Details

·The House plan consists of two bills: HB 416 to pay for the reforms and a House committee substitute for SB 2.  We take this approach because the Kentucky Supreme Court has ruled that revenue measures must be voted on separately.

· HB 416 would raise an estimated $800 million over the next decade by:

Capturing future growth of lottery proceeds given to the state.

· Normal growth is estimated at 2.5 percent annually.

· The lottery would also use its current authority to expand games to include internet-based sales and keno.  No legislative action is needed. These two expansions alone would generate $21.8 million in FY 2015 and more than $63 million by FY 2020.

·Current scholarship programs funded by the lottery – primarily KEES, the Kentucky Tuition Grant, and the College Access Program – would be allowed to grow up to 2 percent annually.

2.)    Potentially collecting more money from instant racing.

· The Kentucky Supreme Court agreed in January to consider instant racing’s legality, which lower courts have upheld.

·Instant racing is now held at two sites: Kentucky Downs in Franklin, which began in Sept. 2011, and Ellis Park in Henderson, which began in Aug. 2012.

· Total cumulative revenue at these two sites: More than $220 million.

· If the Supreme Court upholds instant racing, the current formula to divide the pari-mutuel tax would remain the same up to $300 million in total instant racing sales.  After that threshold, pensions would get all of the pari-mutuel tax.

· Money from the pari-mutuel tax now goes to such things as various programs for the horse industry and the General Fund, which has gotten about $770,000 out of the $220 million wagered.  This change could provide about $14.2 million annually to pensions if instant racing expands to other tracks.

Pension Reform Details

The House Committee Sub. to SB 2, WHICH WOULD NOT AFFECT TEACHERS, would:

· Require the full actuarially required contribution, or ARC, to be paid beginning in 2014-15.  The Senate plan merely lists “intent” to pay the ARC.

·Re-set the unfunded liability to a 30-year amortization period, the same as the Senate.

·Allow retirees to receive cost-of-living allowances, or COLAs, if Kentucky Retirement Systems says it has surplus revenue to pay for it OR the state pre-funds it.  The Senate plan does not have any provision for COLAs.

· Modify the inviolable contract for new local and state government employees and Kentucky State Police hired after July 1, 2013, who would maintain a defined-benefit retirement plan.  These additional limitations would let the state amend future benefits and employee contributions if another crisis arises.  There would be a high bar to do this, including a requirement to pay the full ARC over the previous five years.

·In addition, new employees in hazardous-duty jobs would have to have 25 years of service and be 50 years of age to get full retirement under the House plan. Current law doesn’t have a minimum age for retirement for these types of jobs.

· The House plan calls for a one-year break before a state or local government non-hazardous employee could retire and then return full-time to a non-hazardous job in the system, beginning in July 2014.  The Senate plan calls for a two-year break.

· The House plan calls for a one-month break for hazardous-duty retirees who return to a hazardous-duty job or one that requires peace officers professional standards certification or one that is not a full-time job.  The Senate plan calls for a one-year break for these employees.

· The House plan tackles salary spiking for retirement purposes in the final five years of an employee’s career, as the Senate does, but the House ensures that legitimate promotions do not apply in these cases.  Otherwise, if a salary does spike more than 10 percent during that time, the last employer would pay for the additional costs.

· The House and Senate plans differ slightly, but both call for expanding the Kentucky Retirement System board.

·The House plan goes further by creating an 11-member Public Pension Retirement Board, comprised of four legislators, the Auditor, the Attorney General, the State Budget Director, and four appointees with investment experience.  This would give the General Assembly more oversight and review of the retirement system.