Workers expect their defined contribution plans to play a greater role in their retirement income than annuities.
Jan. 06--FRANKFORT -- It could be a kinder, gentler Capitol when lawmakers return Tuesday for the 2013 General Assembly. Republican Senate President David Williams, who fought Democratic governors and House speakers for more than a decade, has left. But Republicans still hold the Senate, Democrats still hold the House and Kentucky is still broke. So the 30-workday session may be as contentious as usual. If so, expect at least one special session (at a daily cost of about $60,000) to deal with unfinished business.
Here are some of the major issues to watch:
Kentucky's ailing pension system could be the toughest problem facing the General Assembly.
For many years, Kentucky governors and legislators knowingly failed to put enough money in the state pension fund at the Kentucky Retirement Systems. This fund is responsible for providing lifetime pensions to 117,000 current, former and retired state employees. Simultaneously, the politicians sweetened retirement benefits to encourage state employees to jump off the payroll a few years early.
Now the bill is due.
Overall, the $11 billion Kentucky Retirement Systems has only 44 percent of the money it needs to meet future obligations to state workers, local government employees and state police. (Pension experts say anything less than 80 percent is worrisome.) Within KRS, it's the pension fund for state workers that's the emptiest, down to a 27 percent funding level. Almost no public pension fund in the country is in worse shape.
State employees are guaranteed their pensions by law, so a collapsing pension fund could force tax hikes and suck money from everything else, including schools and public safety. Bond agencies have noticed, downgrading Kentucky's debt rating and making it more expensive for the state to borrow.
"This is not just another Frankfort issue. Kentucky is at a tipping point," said Dave Adkisson, president of the Kentucky Chamber of Commerce.
Lawmakers say there's no point in assigning blame.
"We're focused on solutions," Sen. Damon Thayer, R-Georgetown, said Dec. 17 on Kentucky Educational Television. "We know why we got here. Everyone knows why we got here. Let's figure out a way to stop digging and then fill in the hole."
Thayer co-chaired a legislative task force that proposed solutions in November. It said the legislature must pour more money into the state pension fund, starting with an extra $327 million in Fiscal Year 2015 and ramping up to $1 billion by Fiscal Year 2020. The task force did not identify where the money would come from.
Lawmakers insist they're serious about fixing the problem this time. House Speaker Greg Stumbo, D-Prestonsburg, said he wants the legislature to dedicate a funding source to shore up the pensions -- possibly a higher cigarette tax or the closure of some tax breaks.
Thayer's task force also recommended trimming retirement benefits. A law requiring annual cost-of-living adjustments for pensioners, typically waived in recent years, would be repealed altogether.
Instead of pensions based on their highest salary years, new state employees would enroll in a "hybrid cash-balance plan" that guaranteed them at least a 4 percent return on money they set aside over their careers -- like a private sector 401(k) account, but with some protection. However, the new employees' benefits would not be shielded by the same "inviolable contract" that covers current employees, so the legislature could come back later and reduce them.
State employees and retirees are upset by what they consider an ideological attack on defined-benefits pensions. The Laura and John Arnold Foundation, which advised Kentucky lawmakers on this issue, has led a push in various states against traditional pensions, state retirees say.
"I think it is fundamentally unfair to create two classes of workers, one of which is guaranteed certain benefits in retirement and the other of which is not," said Jim Carroll, co-founder of a Facebook community called Kentucky Government Retirees.
Other lawmakers have their own ideas for pension reform, such as transparency.
Chris McDaniel, elected to the Senate in November, wants KRS to disclose the sums that individual government employees get from their pensions. Currently, government salaries are public information in Kentucky, but government pensions are secret, so nobody knows who collects the biggest pensions and why. McDaniel, a Republican from Taylor Mill, said he will sponsor a bill to uncloak the system.
"Taxpayers pay into the pension system and they deserve to see where their money is being spent," McDaniel said. "People should be able to go online and see who is drawing what. When you shine a light on something, you learn all sorts of interesting things about how it works."
Kentucky spends more money than it collects in taxes. Its state budgets are "balanced" in the same sense that a household budget is balanced by racking up credit card debt, skipping the mortgage payments and draining the children's college fund. This structural deficit is one reason why Forbes magazine recently identified Kentucky as "a death spiral state" with a bleak economic future.
In response, Gov. Steve Beshear last year named a task force to suggest reforms to the state tax code. In December, that task force recommended changes it predicts would generate $659 million a year in new revenue.
The proposals include raising taxes on pensions; assessing a 1 percent utility tax on residents and businesses; increasing the cigarette tax by 40 cents to $1 a pack; expanding the 6 percent sales tax to include more services, though the task force did not identify which services it had in mind; and placing a $17,500 cap on an individual's itemized deductions.
To partially offset those increases, the commission proposed cutting $100 million a year from corporate taxes, slightly lowering personal income tax rates and providing an earned-income tax credit for low-income workers.
"I am mindful that this is a first step," Lt. Gov. Jerry Abramson, the task force chairman, wrote in its report.
Nobody knows if there will be a second step. By the task force's own count, Frankfort has seen a dozen tax reform studies since 1982. Most were shelved and forgotten until it was time for the next one.
The Republican-led Senate shows no enthusiasm for new taxes in 2013. And this is one of the legislature's short 30-day sessions, so under the rules, each chamber must approve tax increases by a 60-percent "super-majority" vote. For that reason, tax reform is likely to be addressed in a special session with simple-majority voting rules -- if it's addressed at all.
"I don't see any real groundswell of support at this time for an initiative on the tax reform issue," said Stumbo, the House speaker.
Beshear has pushed unsuccessfully since 2008 to legalize casino gambling at horse racetracks. David Williams, the former Senate president, was the most visible opponent. But he wasn't the only opponent. The Republican Senate remains a conservative body, as does, on most social issues, the Democratic House, dominated as it is by rural lawmakers.
Still, Beshear wants to expand gambling, and the issue "shows no signs of going away," said Thayer, who is presumed to be the next Senate majority leader.
In 2012, Thayer was the governor's chief legislative ally on casino gambling. They might succeed this winter, most likely by putting a constitutional amendment on the ballot. Kentucky's horse industry hungers for the fortune it would collect from slot machines. Just one industry leader -- Churchill Downs in Louisville -- has given more than $113,000 in political donations over the last two years, with much of that going to state lawmakers.
Rep. Dennis Keene, D-Wilder, pre-filed the first gambling bill for the session. It would require local-option elections for the approval of casino gambling in urban areas with a horse racetrack, with a 31 percent tax on gross gambling revenue going back to the government. Look for other bills to come.
Every 10 years, the U.S. Census Bureau counts how many Kentuckians live in each county. The legislature uses that data to redraw state House and Senate district lines to reflect population shifts. Unofficially, there's also an effort to protect incumbents in each chamber's majority party and to hurt members of the minority party. This is how lawmakers unpopular with leaders can find their districts moved far away.
The legislature approved a redistricting plan in 2012 that took care of the majority parties. However, the minority parties successfully challenged those maps in a courtroom fight that cost taxpayers more than $200,000. Thus chastened, the General Assembly could try again in 2013 -- or it could punt until 2014, which is the next election year in Kentucky.
Lawmakers say Medicaid requires their attention on two fronts: the state's bumpy transition to private management of the program and the implementation of Obamacare, the nickname for the federal Patient Protection and Affordable Care Act of 2010.
(Medicaid is a federal-state program that provides health insurance for 826,400 poor or disabled Kentuckians, which is one-fifth of the population. The state paid $1.3 billion for Medicaid in 2012; the federal government paid $4.3 billion.)
To save money, the Beshear administration hired three companies in 2011 to manage Medicaid outside of Louisville, which already had its own private Medicaid manager. Since then, medical providers have complained about late and inadequate payments, patients have complained about confusion in their coverage, and one of the companies -- Kentucky Spirit -- has sued the state to get out of its contract.
The legislature must provide better oversight, said Sen. Robert Stivers, R-Manchester, who is expected to be the next Senate president.
"I wish I could say it would be as simple as fixing one or two things, but I don't think that you can target it so simply," Stivers said. "These are total systemic questions that have to be looked at. This is a complex system with multiple parts."
Stumbo, the House speaker, said he wants the state to establish a new and independent agency to mediate disputes between the managed care companies, medical providers and the Cabinet for Health and Family Services. Disputes over payments or medical treatment could be handled by these mediators rather than going to the cabinet, which has a financial incentive to not spend money, Stumbo said.
Also in 2013, the General Assembly will debate whether Kentucky should -- under Obamacare -- expand Medicaid to give health coverage to more people, as states are encouraged to do. (Originally, Obamacare required Medicaid expansion by the states. The U.S. Supreme Court struck that down and made it voluntary.)
If Kentucky adds adults to Medicaid who are younger than 65 and have incomes up to 138 percent of the poverty level, the federal government will cover all of the additional cost in 2014 -- but by 2020 and in later years, the federal match would drop to 90 percent. So Kentucky would have to spend more on Medicaid eventually. Nobody knows how much more.
Stivers, the GOP Senate leader, said the state already struggles to pay its current Medicaid tab. But Stumbo said it would be "penny-wise and pound-foolish" to leave an estimated tens of thousands of Kentuckians uninsured when Washington is willing to pay most of the expense.
House Bill 1 -- so numbered because it is the top priority of House leaders -- will be a bill recommended by Democratic state Auditor Adam Edelen, to require transparency and accountability from the state's 1,270 special taxing districts, such as water and sewer districts, health districts and library districts.
Special taxing districts spend about $2.7 billion a year with little oversight, Edelen warned in a November report.
HB 1 would require those districts to register with the state, making it easier to track them. Those that fail to turn in required paperwork or financial information could be subject to an audit by Edelen's office. All special taxing districts also would have to comply with county ethics codes.
Agriculture Commissioner James Comer, a former Republican House member, is promoting industrial hemp for 2013. Comer wants a resolution from the General Assembly urging Washington to revise federal drug policy and allow hemp cultivation. He said if Congress acts quickly, the first hemp seeds could be planted in Kentucky in spring 2014. In Congress, U.S. Sen. Rand Paul, R-Ky., likewise is pushing for hemp.
Advocates see a bright future for hemp products, including ethanol production, fiber, textiles, food, cosmetics and car parts. Congress should "get out of the way and let the private sector create jobs in rural communities manufacturing this product," Comer said last fall.
However, the Kentucky State Police is concerned about hemp, arguing that it's hard to distinguish in the field from marijuana.
Rep. Terry Mills, D-Lebanon, pre-filed a bill to establish a state licensing process for hemp farmers, including criminal background checks and police monitoring of their fields.
John Cheves: (859) 231-3266. Twitter: @BGPolitics. Blog: bluegrasspolitics.bloginky.com
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