Firm studying state’s pension problem recommends switch to pure 401(k) plans for most workers

Aug. 29--An out-of-state firm that analyzed Kentucky's public pension crisis recommended dramatic changes to the pension systems Monday, particularly, moving most workers to a 401(k) retirement plan without any guaranteed benefit.

If adopted at a special legislative session later this year, teachers and state workers in non-hazardous jobs would be placed in 401(k) retirement plans where the most that would be guaranteed would be the state's matching contribution.

"There are a number of recommendations here we wish we didn't have to make," said Mike Nadol, a consultant for the Philadelphia-based PFM Group. Nadol presented the firm's recommendations Monday to the state Public Pension Oversight Board in Frankfort.

Changes to the pension systems are needed, Nadol said, "to get to a healthier place over time."

The state's pension systems for teachers, state police, local law enforcement officers and state workers are suffering from shortfalls, with the systems not having enough funds on hand to meet obligations to current retirees. In July, Sen. Joe Bowen, an Owensboro Republican, told the Greater Owensboro Chamber of Commerce that the Kentucky Employee Retirement System fund for state workers in non-hazardous jobs has only 13.8 cents for every $1 in benefits it must pay.

The KSP pension fund has 30.3 percent of funds needed to meet its obligations, while the teacher retirement system has 50.6 percent of what it needs, Bowen said. The county employee retirement system and the state system for hazardous duty workers each have 59 percent of needed funds, he said.

Bowen, who chairs the pension oversight board, said Monday the state "is facing arguably the greatest financial challenge in its history."

State Budget Director John Chilton said officials are anticipating a $200 million budget shortfall in fiscal year 2018-20, and the state's budget reserve is nearly depleted.

"The commonwealth needs to raise or free up $1 billion" to cover its pension obligations in the next fiscal year, Chilton said.

Nadol said "in this case, strong action is needed to (reduce) the risk of that budget squeeze ... that erodes the commonwealth's ability to address a number of needs." While the proposed changes could result in lawsuits, "we do believed the options ... cold pass judicial scrutiny," Nadol said.

Nadol recommended current employees in non-hazardous jobs in state government, county government and the judicial system be moved into traditional 401(k) plans, without the guaranteed 4 percent return on investment state workers in the "hybrid 401(k) plan" currently receive. The same would be true of teachers currently in the system, and all future hires.

While teachers in Kentucky do not receive Social Security benefits, the recommendation includes making teachers eligible for Social Security.

State troopers and hazardous duty workers, such as law enforcement and public safety workers, would remain on the current "hybrid 401(k) plan. But part of that recommendation includes a provision that people in those categories not retire until they are 60 years old, rather than after 25 years of service.

Retirement for teachers be set at 65 years old.

The "hybrid 401(k)" plan give workers a guaranteed 4 percent annual return on their contributions, and 75 percent of any returns over the 4 percent.

"This would be a lot easier if we did not have to think about" making changes to current workers' retirements, Nadol said.

The money already accrued by workers under the current plans would be frozen. While the worker would receive that money upon retirement, any retirement earnings after the funds were frozen would come from a 401(k) plan, Nadol said.

Nadol recommended workers voluntarily be allowed to "buy out" the frozen funds, rolling them over into their new 401(k) plans.

The recommendation also include changes to health care benefits that retirees receive, Adam Reese, a consultant with PRM Consulting Group, a Washington D.C.-based consulting firm with offices in several cities, said retirees generally have medical coverage that is "more generous" than what's available for current state workers.

Law enforcement officials have said previously that concerns about how legislators might change the pension system has resulted in officers leaving the profession. When asked about about that, Nadol said it's possible that workers close to retirement could be "grandfathered" in to their current plans.

Chilton said the changes would not happen overnight and that workers would have time to learn about their options and make decisions.

"I don't think the changes being proposed are going to create a run for the door" among current workers, Chilton said, a comment which made many people in the audience laugh.

Bowen people shouldn't rush to judgement based on the recommendations alone.

"At this point, we don't have a plan," Bowen said. "I think it's unfortunate people would make a decision off little or no information."

If all the recommendations were adopted, they would reduce the amount the state will have to pay into the pension systems for years to come, according the PFM Group analysis. Making the changes would put the state "in a much stronger position to weather any future storms that would come along.

"Doing nothing is perhaps the worst path you can take," Nadol said. "A status quo approach is not possible."

Bowen said the decisions on how to address the pension issues lay with legislators.

"It will be up to us to effectively craft a plan going forward," Bowen said.

James Mayse, 270-691-7303, [email protected], Twitter: @JamesMayse

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