Though less aggressive than previous versions, Kentucky’s latest pension overhaul still breaches inviolable rights and will likely face legal challenges, three public employee advocates told Debtwire Municipals.
“Over the last decade, there’s been substantial changes on the benefit side, so from our viewpoint a lot has already been done up until the limits of our contract rights,” said Jim Carroll, president of the advocacy group Kentucky Government Retirees, which counts roughly 14,000 members among its ranks.
“We believe that there are issues with this new bill that actually assault our contract rights and we imagine that those would be litigated,” Carroll said.
The measure, Senate Bill 1, is Kentucky’s latest attempt to address a combined USD 42bn in unfunded pension liabilities – by many measures the worst pension crisis in the country. Next fiscal year alone, the Bluegrass State is looking at an additional pension tab of USD 700m amid decreasing revenues.
To be sure, SB1 is a much less aggressive pension overhaul than the one proposed by Governor Matt Bevin (R) last fall, as it no longer forces current employees and teachers into a 401(k)-style defined contribution plan. Moreover, the measure proposes smaller cuts to cost-of-living adjustments (COLAs) for many retirees.
Subsequent amendments to SB1 have watered down the measure even further. Nevertheless, Kentucky’s own Attorney General Andy Beshear (D) has deemed the reform illegal, citing 21 provisions that breach the state’s inviolable contract.
“We anticipated all along that the initial plan that was forced on lawmakers back in the summer was so abrasive that anything they did was going to look better,” said Ron Richmond, the political director of the AFSCME Indiana-Kentucky Council 962. The council represents around 5,000 members in Kentucky.
“In our opinion it [SB1] is quite unfair because the pension deficits are not the result of anything that our people did but rather the state’s failure to make its required contributions,” said Richmond. “So I imagine that the state will be tied up in litigation over this.”
Kentucky’s latest push for pension reform would be the second such overhaul in five years. In 2013, the previous administration—with input from Pew Charitable Trusts—passed comprehensive pension legislation limiting COLAs for all retirees and entering new hires into a cash-balance defined benefit plan.
One of the most contentious aspects of SB1 is a provision that slashes teachers’ COLA to 1% from the current 1.5%. The provision has been at the heart of statewide teacher protests that eventually forced the bill back to committee.
“If many of the elements affecting teachers remain intact there will be challenges on it,” said Larry Totten, president of the Kentucky Public Retirees, a government retiree advocacy group with roughly 4,100 members.
“While we don’t find anything in the bill that cuts our benefits, we do believe the reform is pushing certain changes right up to limits of the inviolable contract,” Totten said.
SB1 also poses a great threat to local governments, which would see a substantial increase in pension contributions as a result of switching to level-dollar funding.
The possibility of litigation had been foreshadowed by PFM all the way back in August of last year, when the firm acknowledged that legal challenges were likely to arise in response to the proposed modifications. Bevin hired PFM to produce three reports analyzing and prescribing solutions to the pension crisis.
Don’t cut the pie, grow it
The forces that oppose the pension reform contend that Kentucky needs to focus on revenue growth rather than overhauling its retirement systems a second time.
“There’s enough revenue on the table in the form of tax loopholes that if they even close 10% of those loopholes they could easily correct this [retirement] funding issue,” said Richmond. “But instead they deliberately cut right around 70 programs from the budget, the majority of them within education.”
Bevin’s administration is attempting to divide and conquer by having different groups argue against each other instead of demanding their pension rights, added Richmond.
The tax loopholes, also known as tax expenditures, amount to nearly USD 14bn as of 2018, according to the Kentucky Center for Economic Policy.
“There are dozens of things that can be done [to grow revenue], and it’s just a matter of the legislators having the gumption to take them on,” said Totten.
Now on day 48 of Kentucky’s regular legislative session, SB1 has only 12 more legislative days to make it through both chambers before the session’s constitutional 60-day limit is up on 15 April.
And it’s the House, in fact, where the bill is expected to suffer most changes, mainly because many representatives fear political repercussion, said all three advocates.
“They [the House] are more vulnerable, they’re more freshmen legislators than there are in the Senate,” said Richmond.
Just last month, Democrat Linda Belcher flipped a House seat in a district that President Donald Trump (R) had won by 49 percentage points.
“It’s frustrating that people from the inside are feeling the squeeze when we did nothing to cause this, and there’s obvious options in funding that they’re not even willing to explore,” said Richmond.
The Office of the State Budget Director did not return calls for comment.