Kentucky state Senator Danny Carroll feels certain a special session will be called in the coming months to take on the state’s pension crisis and that the resulting bill will be a revised version of the late-session bill lawmakers passed and that the governor vetoed.
That bill would have allowed regional universities and quasi-state agencies to exit the pension and avoid increased costs. Governor Matt Bevin vetoed the bill, saying it had legal and financial issues. His reelection running-mate, Senator Ralph Alvarado, says a framework is underway for the new bill. The expectation amongst lawmakers is that Bevin will call a special session before July 1 (when the increase in obligations kicks in) to revisit the vetoed bill and that a more expansive tackling of pension issues would be in the next general session.
Carroll joined Representatives Chris Freeland, Richard Heath and Randy Bridges in a public policy panel discussion at a Paducah Area Chamber of Commerce breakfast on Wednesday. In terms of getting everyone on board with the revised bill, Carroll said lawmakers have to be comfortable with what gets passed because it will likely have to be defended in court. “About anything we do related to the pension, we’re going to have to defend in court regardless of what we think violates the contract and what doesn’t.”
Carroll warned if the aspect of the pension issue at hand is not immediately dealt with, then the contribution rates for many of the quasi-state agencies will be at unsustainable levels. “And if they start folding throughout the state, they are critical services that the state’s going to lose, that the state will likely have to pick up.” He said the part involving universities will remain the same.
Some “heartache” over the bill, he said, involved quasi-state agencies leaving the system where they could finance their unfunded liability over a period of years, but with the stipulation that if they didn't make their payments then the pension funding would stop and those that have retirement wouldn’t be getting their checks. “I think we will get those things tweaked and try to keep it in line as much as possible with any inviolable contract issues,” he said.
Teachers are the lone holdout on changes to the system, Carroll said, but said change is coming and will happen. “The reality of it, when it boils down to it, there’s just going to be some tough decisions made. Most of the changes with some of the other systems, with KERS, CERS, a lot of those changes have already been made and new employees coming in are in a hybrid cash balance retirement.”
Carroll said, simply put, that new teachers will be in a new system. “The idea is to get everyone out of the defined benefit system,” he said. “Everyone in the other systems now coming in is in the hybrid cash balance system.” And the vetoed bill would have also moved teachers into that system, he said. “I don’t think that it’s really going to be much of a struggle to get that aspect of reform passed. And it will basically allow us in the future, so the generations that follow, there won’t be this fluctuation. It’ll be set and it’ll be dollars the state can manage.”
A change that would affect current teachers involves requiring people to work longer before retirement. “Because we are living longer, that is adding millions of dollars in debt in the pension system in unfunded liabilities,” Carroll said. “If the teacher, for instance, has to work three or five years longer and maintain the benefits that they got, I really don’t have a problem about that. I feel bad, but we just don’t have options at this point.”
Changing or altering the COLA would also have a big impact. Carroll said this is yet another tough decision that needs to be made. “You’ve heard the teachers say ‘well it’s prefunded, it’s prefunded’ -- It’s not. You’ve got teachers getting the COLA that never paid into it. That never paid into this prefunding.”
KERS Non-hazardous is about 13% funded, Carroll explained. If that system goes “belly up,” that money starts coming out of the general fund, “And you talk about turning this state upside down, that’s what’s going to happen.” He said the only way to address the issue is through a long-term plan of about 30 years, paying off the unfunded liability. “We have to decide as a state how much money - how much extra revenue - each biennium that we can invest in the pension system.”
Freeland noted that Marshall County does not have a large budget and their pension increase is going to be $800,000 this year. He said the health department’s portion is $550,000 in pension obligation increases and Murray State University will see $4.8 million. “And that’s not sustainable. I mean, you’re going to have cost increases, tax increases on the local level. You’re going to have more cuts on the state level. It’s something that has to be dealt with. It’s been kicked down the road for two-plus decades.”
Carroll, Freeland, Health and Bridges discussed a need to look at a comprehensive tax reform package, shifting toward services and doing away with income taxes in the future.
“The word is balance,” Carroll said, with a phasing-in of tax reform so as to understand what revenue will be generated by the taxes. He said a ‘no income tax structure’ is the best approach. “Because it’s based on what you use,” he said. “And I don’t know how you can get any fairer than that. If you’re lower-income and you don’t use a lot of these services, then your tax will be lower. If you’re higher-income and you use a lot of these services, you’re going to be paying in a lot. So, I think that’s a fair tax system.” He said doing away with income tax will improve quality of life, be attractive for industry and will make Kentucky more competitive with surrounding states.
Revising tax exemptions will be part of the tax reform process, Carroll said, and added, “We have to be careful as we do that that we don’t take away some of the exemptions that could have a negative impact on business and industry.”
Carroll said he wants to ensure future generations don’t have to deal with the pension issue, and is willing to put his legislative seat on the line to see a resolution. “If my vote - taking a hard vote - costs me my seat, I’m willing to take that risk. I don’t want to leave that for my kids or my grandkids to have to deal with. And I think that has to be paramount.”