Consultants Recommend Freezing Pension Benefits, Rolling Back Cost-Of-Living Raises

Aug 28, 2017

Consultants delivered their final recommendations for shoring up Kentucky’s ailing public pension system Monday. The independent group submitted a bleak picture of the state’s options, with both current and future employees in line for stripped down offerings.

"The continued severity of the remaining funding challenge is extraordinary," warned Mike Nadol with PFM, the consultant group charged with preparing a menu of possible fixes for Kentucky’s anemic retirement systems – items that could take up to 30 years to complete under the recommendations.

If adopted as presented, the framework would usher in major changes for most covered under the system. Among the key differences:

  • Non-hazardous or general civilian workers would see cost-of-living raises stretching from 1996 to 2012 rolled back, current accruing benefits frozen, and retirement age set at 65.
  • Non-hazardous employees would no longer be able to boost benefits through unused sick days and comp time.
  • Cost-of-living increases for teachers would be suspended until the system reaches 90 percent funded.
  • Future non-hazardous workers would be placed in 401(k)-style plans while incoming teachers would shift to social security and a defined contribution plan.

The final recommendation package came after the state Public Pension Oversight Board absorbed some tough numbers from Budget Director John Chilton, who warned the commonwealth will need close to an extra billion dollars a year to meet the actuarially required contribution, typically referred to as the "ARC." That's $700 million to funnel into the pensions system themselves and another $200 million to refill depleted reserves.

To make those numbers balance, Chilton said state lawmakers would need to dramatically increase last year's 9 percent cuts. If public education and Medicaid were exempted, the state operating budget would be facing 34.4 percent reductions. That figure could be halved if the state slashes $510 million from K-12 education.

"It's very sobering day to hear what you have to say," State Sen. Jimmy Higdon of Lebanon told the consultants. "I do keep telling myself they are recommendations, so we have our work cut out for us."

The report comes as Gov. Matt Bevin continues mulling dates for an anticipated special legislative session on pensions and preparing for an online Q&A on the issue Monday night.

In a statement following the report, the governor said, "Change is necessary. Time is not our ally—we must act now to get our financial house in order. There is no other viable option."

As for Kentucky's cumulative unfunded pension liabilities, estimates vary. A low-end estimate puts the total at $37 billion, but Bevin's newly-minted pension website places the number at $64 billion. During his State of the Commonwealth Address in February, the governor said the true amount is close to $80 billion.

Read the PRM Group's full report.