October 10, 2017
We received the following PROPOSED changes to the pension systems, and thought you might want to see them. Three things in particular apply to retirees:
1. No clawback of our cost of living raises (COLAS)
2. All retirees will be required to pay 3% more for their health insurance
3. No separation of CERS
Although this birds-eye view of the bill should be released this week, there are still many fine details yet to be settled. In short, there is still no final version of the bill.
Some of the proposed system changes:
* Nearly all new hires, including teachers, will be put in a defined contribution (DC) plan. This includes everyone EXCEPT hazardous employees. Note that decisions regarding hazardous employees are still being finalized, and key policymakers have indicated that hazardous changes will be minimal.
* Tier 1 (hired before 2009) and 2 (hired between 2009 and 2013) employees can retire with a defined benefit (DB) plan after 27 years (or per the current rules). After that time, their pension retirement will be bifurcated and they will continue accruing benefits under a defined contribution plan. In short, there will be no “double-dipping,” but active employees can remain in the system under a DC plan if they wish to work and earn more toward retirement.
* Tier 3 employees (hired after the 2013 reforms that created a hybrid cash-balance plan) will be moved to a defined contribution plan.
* Any state employee/teacher/CERS employee has the option to move to a defined contribution plan, if desired.
* All retirees will be required to pay 3% more for their health insurance.
* The proposal by the state’s public universities to move all new hires into a defined contribution plan will be included as part of the overall plan.
Teacher-specific issues:
* Teachers currently in the school system who already are 27-30 years in the system will be placed into the defined contribution plan going forward. Their retirement for the first 27-30 years will remain a defined benefit plan with no changes to benefits. However, for years accrued after the 27-30 years, the local school board will have pay the local match into Social Security for that teacher. It is being discussed that the state will work into the pension reform legislation a funding provision to help school districts by picking up the local match of the Social Security cost in the first year. This is primarily due to school boards’ inability to raise taxes so quickly and the big unfunded budget hole this will create for them.
* Any current teacher who is working may go into the defined contribution plan as well, if desired. This option may be preferred or a 33-year-old teacher who wants to start paying into Social Security now instead of later. A person has to pay at least 40 quarters into Social Security before they are eligible to receive those benefits.
* All new teachers hired after any pension reform plan passes will be in a defined contribution plan with Social Security benefits.
What is NOT part of the bill:
* NO raising of the retirement age.
* NO CERS separation – the Governor has stated that the separation matter is a governance issue, not a structural one, so it may be considered in future sessions.
* NO claw back of Cost of Living Adjustments (COLAs)
* NO emergency clause, meaning the legislation would become law 90 days after the Governor signs the legislation.
* NO buyouts for people with some time has been considered, but due to the complexity of the matter, it is NOT part of this bill.
Additional considerations:
* The state will move to a level-dollar funding mechanism. This change, as spelled out in the July meeting of the Public Pension Oversight Board, requires an additional $700 million annual commitment to the system in order to cut into the “principal” of the unfunded liability.
* This will be a 30-year fix.
* Tax Reform is still on the table, but not as part of a special session to address pensions. House Speaker Jeff Hoover will appoint a working group to put more structure to the tax reform discussion once the special session on pensions concludes.
* There is an awareness that local governments will be impacted by this legislation, and the Administration intends to “phase-in” increased payment obligations.
* The fiscal impact has not yet been scored (for both the state and local governments), but even with no changes, the Administration is identifying 17.4% reductions across most of state government.
Alan R. McDonald
Publicity Chair
North Central Chapter Kentucky Public Retirees
