The Kentucky Chamber urges the Kentucky General Assembly to take decisive action during the 2019 legislative session to strengthen our troubled public pension systems. Ensuring the financial stability of the commonwealth by setting the pension systems on a sustainable path is of vital importance to Kentucky's business community.
We commend the General Assembly for creating the pension working group to examine the situation and make recommendations for reforms. This reset is necessary to fully air the facts about the condition of our public pension systems and to allow for deliberate consideration of any proposed changes to benefits. The Kentucky Chamber urges legislators to ensure that the views of all stakeholders are heard and considered during this process.
As you know, the Kentucky Chamber has been speaking out about the state's pension challenges for more than 12 years. We have produced a number of reports and provided legislative testimony highlighting the negative impact of rising benefit costs on other important areas of state spending, especially education, and advocating changes to make the retirement systems more sustainable.
We led a coalition of organizations to support the successful 2013 pension reform legislation. In 2015, we organized an internal task force to focus on the pension issue, and the chamber publicly supported pension legislation enacted by the 2018 Kentucky General Assembly.
The General Assembly is to be commended for the significant actions it has taken to shore up the pension systems in recent years, including:
n 2008 KRS Reforms to increase employee contributions, impose a minimum retirement age and make other improvements.
n Shared Responsibility for Teachers under which teachers contribute more for health insurance costs.
n 2013 Legislation requiring payment of the full employer contribution, ending unfunded COLAs and placing new state and local government employees in a hybrid 401(k)-style plan. KRS Executive Director David Eager has said the 2013 reforms are working and will be a significant part of meeting the system's long-term challenges. He also believes moving to a hybrid 401(k)-style plan would benefit the Kentucky Teachers' Retirement System over the long term.
n KRS Action Updating Actuarial Assumptions resulting in a higher ARC that will infuse more funds into the system
n Full Funding of the ARC in the 2016-2018 and 2018-2020 biennia.
n 2018 Pension Reforms moving new teachers into a hybrid plan, adjusting sick leave policies related to boosting retirement and removing a guaranteed rate of return for employees in the current hybrid plan; the chamber believes these changes set a strong foundation for any reforms that will be enacted as a result of the Supreme Court ruling.
As we move forward, we ask you to consider the business communities' perspective on the critical need for pension reform in the 2019 session:
n The nature of the current pension system means costs constantly accumulate - resulting in less money for education and the vital services our citizens and communities need.
n Every year that passes without significant changes delays meaningful reforms, increases the financial pain that the state is suffering, and increases the chance that taxpayers will be asked to pay more to make the system solvent. This is a critical bottom line issue for Kentucky's business community since it contributes approximately 38 percent of state revenue in income, corporate and sales taxes.
n Contrary to the claims of some opponents of reform, benefit changes currently under consideration will have no impact on retirees, and the impact on public employees still working will be minimal. Changes for new employees will reduce the Commonwealth's costs over time.
n Kentucky is tied with Illinois for having the worst funded pension system in the country. The total unfunded liabilities of our various systems are in excess of $43 billion, an amount that is approximately four times the size of Kentucky's annual General Fund budget.
n Kentucky's pension debt has been cited as a key factor in multiple downgrades of Kentucky's bond rating in recent years.
n Defined contribution retirement plans, also known as 401(k) plans, are standard in the private sector. Recent pension proposals revise public retirement benefits for new employees to more closely resemble plans offered to the general public.
n There are a number of benefits to employees of a 401(k)-style plan: o The portability of retirement funds is particularly favorable to younger workers, who tend to change jobs more frequently than their older colleagues.
n Employees can create a nest egg as contributions earn interest over time, allowing small regular contributions to grow to significant retirement savings. (Investments in the stock market have grown an average of 7% per year since the 1950s.)
n Employee contributions are not taxable, and investment gains are not taxed until they are distributed at retirement.
n The retirement account can be passed on to children or other family members at death.
n Finally, there has been much discussion about what led to Kentucky's unfunded pension liabilities. While information from such entities as the PFM group and the Pew Charitable Trusts has informed the debate and aided in crafting solutions, we strongly believe efforts to assign blame are counterproductive and do nothing to show the way forward. We must focus our full attention on finding the solution.
Our general view is public retirement benefits should mirror those available in the private sector as much as possible. Private sector employees primarily depend on 401(k) plans and Social Security and must work significantly longer than public employees before retiring. There is little rationale for a retirement system that allows public employees to retire as young as their late 40s after working 27 years, when the youngest most private employees can retire is age 62 (when they are first eligible for Social Security).
When considering changes in benefits for future public employees, there are several elements the business community believes should be considered:
n Increase the minimum age for full retirement benefits to at least age 62 or impose an age-and-service combination that would achieve equal financial savings.
n Place new teachers in a hybrid style plan with contribution rates that account for the fact that teachers do not participate in Social Security.
n Remove provisions that allow public employees to boost their pensions (such as the use of the highest three salary years to calculate benefits, higher multipliers for higher years of service, and using unused sick leave to count toward years of service).
n Remove inviolable contract applicability for new teachers (like the 2013 legislative provision that removed the inviolable contract for new employees participating in the Kentucky Retirement Systems).
n Adopt the level-dollar method to determine the ARC which would amortize the total unfunded actuarially accrued liability of pension funds over a set period (like a home mortgage). The current method of calculating the ARC using percentage of payroll is creating underfunding due to shrinking state government payrolls and outsourcing of jobs.
We do recognize that there are legal and ethical guidelines that must be followed regarding public retirement benefits. We wholeheartedly agree with the previous statement by the governor that Kentucky must honor the promises made to public retirees--it is required as a matter of law and we are also ethically bound to do so. The chamber also believes it is important to offer competitive retirement benefits that help Kentucky recruit and retain quality teachers and other government employees.
In our view, the commonwealth's interests are best served by a deliberate process that produces thoughtful pension reforms that can win legislative approval and withstand a costly and time-consuming legal challenge that would, at best, delay needed reforms and could ultimately undo needed changes. We believe the best way to develop a clear and certain path forward is through a combination of additional financial investments in the retirement system and benefit changes that are legally sustainable.
We fully understand that additional revenue may be required to meet the commonwealth's ongoing financial obligations, both for pensions and other important areas such as education. The chamber will continue to support comprehensive tax reform that improves Kentucky's competitive position and provides for long-term revenue growth.
The business community again legislators to take action on pension reform during the 2019 session. We look forward to working with you to advance changes in Kentucky's public retirement systems that are financially and legally sustainable, honor promises to retirees, and provide retirement benefits that help Kentucky recruit and retain quality teachers and state and local government employees.
Dave Adkisson is president/CEO of the Kentucky Chamber of Commerce.