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Kentucky reform recommendations include cash balance plan for new hires

Kentucky Capitol Dome
The Kentucky Capitol

A new cash balance plan for new state hires in Kentucky is among the reform recommendations for Kentucky Retirement Systems, issued Wednesday by the state's Public Pensions Task Force.

Other recommendations include eliminating the cost-of-living adjustment unless the pension plans are 100% funded, requiring employers to pay the full actuarially required contribution to the Frankfort-based pension system starting July 1, 2014, and resetting the amortization period to 30 years beginning in 2014 from the current 30-year period that began in 2007.

The task force, made up of state representatives and senators, will incorporate the recommendations into a final report on Dec. 7 that will be forwarded to the General Assembly.

“Our intention at this point is to have all the recommendations in one omnibus retirement bill,” said state Rep. Mike Cherry, co-chairman of the bipartisan task force.

There is currently a phase-in plan to reach the full actuarially required contribution by 2025 for the Kentucky Employees Retirement System Non-Hazardous plan, 2019 for KERS Hazardous plan and 2020 for State Police Retirement System. The $3.3 billion KERS Non-Hazardous plan was 33% funded as June 30, 2011.

“One of the biggest areas of discussion at the internal level was should we or should we not get involved in the business of recommending where the funds come from” to make the full employer contributions, Mr. Cherry said in a telephone interview. It was ultimately decided to leave that to the state tax and finance experts.

KRS had about $14.8 billion in assets as of June 30, 2011, including insurance funds, with $19.2 billion in unfunded liabilities for a funded status of 43.5%.

Recommendations also include requiring employers to pay actuarial costs for pension spiking cases, eliminating double dipping, increasing transparency on the KRS website, and increasing KRS board seats to 11 from nine.

William Thielen, KRS executive director, said eliminating the automatic COLA and paying the full actuarially required contribution will greatly improve the funded status.

Messrs. Cherry and Thielen acknowledged a cash balance plan will not have an effect on the pension deficit in the short term, but Mr. Cherry said the state does not want to be in a similar position 30 years from now.

The proposed cash balance plan would keep employee contributions the same with employer contributions varying based on funding policies. Employee cash balance accounts would guarantee a 4% annual return with the accounts receiving 75% of returns above 4%. There would not be a COLA. At retirement, employees could purchase an annuity based on the assumptions used by KRS.

“We will need more specifics in order to comment on and analyze the impact of benefit changes for new hires,” Mr. Thielen said in a release on the pension fund's website. “However, it should be pointed out that any changes in benefits for new hires will have no effect on the current unfunded actuarial liability and the cost related to it.”