Murray State University's Board of Regents discussed in their annual retreat on Thursday the roadmap ahead with regard to making a decision on how to deal with KERS Non-Hazardous following a bill passed in a special legislative session that provided “relief” to some universities in freezing pension rates for one year and providing mechanisms to exit the system.
The KERS employer contribution rate is currently frozen for one year at 49%. That rate could increase to 84% or more on June 30, 2020. Currently, Murray State pays about $6.1 million in contributions to KERS. About 338 employees in that system (last year, that number was 488, but was reduced largely due to outsourcing dining). Vice President of Finance and Administration Jackie Dudley explained that number could go to $10.4 million if the percentage climbs to 84%.
The number of employees in the system could be lowered by further outsourcing as well as an evaluation of vacancies. Dudley noted that an RFP was recently issued for facilities management. Should a company be able to do the various tasks: custodial, grounds, maintenance, that 338 would be reduced by 150. Regent Don Tharpe said the university is going to look a lot different over the next 20 years, for instance, not owning lawnmowers or weed-eaters or having an in-house HVAC team, but rather contracting out those services. “We have to look at doing business differently,” he said.
The options the university faces are remaining in the system and not taking action, ceasing to participate and paying a lump sum or ceasing to participate and paying out of the system over a period of 30 years.
Ceasing to participate through financing with KRS, paying out of the system over a 30 year period, has a 5.25% interest on pension and a 6.25% interest on health insurance, according to Dudley. This option would involve collateral using university assets. The total KERS Non-Hazardous pension liability as of June 30, 2019 is more than $142 million.
On doing a private bond, Jackson said it would be very difficult to negotiate full collateralization of all university assets, “That’s a 30 year mortgage on the institution of everything we know and own and see. Probably not a good idea. Going into the private marketplace is probably, from experience as well as talking to others, impossible.”
Jackson said pledging all assets of the institution for three decades is a “difficult” and “huge” decision. He said, on the private bond route, he didn’t think other institutions would do that. “It’s impossible, really, if you think about it. Many of the assets that we own already at Murray State University are already pledged, for about $75 million dollars in indebtedness that we have for housing and dining facilities.”
Human Resources Director Joyce Gordon said while the pension cost is almost immeasurable, the impact also affects employees and productivity. How employees are impacted by how their employer decides to exit the system. A “soft freeze” out of KERS depends on how long one has been in the system and which “tier” they fall into.
In a soft freeze, Tiers 1 and 2 would be allowed to continue within KERS and would continue to get service credit. Gordon said it’s not clear whether the university would pay individual employer contribution on those or whether that will be scooped up in the liability. That service credit is only so long as an employee stays at the university. If one were to leave, they would be a new employee for another employer. Tier 3 people have no option but to exit the system and are transferred to the optional retirement program. They will have the ability to decide for their own accounts whether they want to leave that account with the retirement system to continue to collect interest - but would not have a value until that person retired or resigned. A complicating factor, Gordon said, is that KERS is set to change their actuarial factors on January 1, 2020.
Regent Lisa Rudolph questioned whether Murray State could afford to get out of the system. She said she believed the most responsible thing to do is not add to KERS and decreasing by attrition. “That’s our only option, it seems like,” she said.
Regent Chair Dan Kemp said the board needs to do their due diligence to adequately review options with the help of a consulting firm. “I don’t think we can decide now,” he said.
Next steps involve engaging a firm to prepare cost estimates of options provided in the recent pension relief bill. Regents are expected to vote on an agency on Friday. Dudley said another important timeline step is April 30, as that is the last day an employer can submit a change. June 20 is the effective date of “cessation” for an employer who opted-out of KERS.
On hiring a consulting firm, Jackson said, “It forces us, as we voted in June, to look at every possible option to mitigate our exposure to KERS. That’s really where we are. And that’s probably the best option.”