Senate budget committee chair says General Assembly likely to address public pensions by saving money on non-protected benefits for future employees; to be determined: what isn't covered under the "inviolable contract"

Courier Journal, Louisville, July 15, 2017

Can public pension benefits be cut? Kentucky officials looking into it

By Tom Loftus

Advocates for public employees and teachers in Kentucky are uneasy as Gov. Matt Bevin prepares to call a special legislative session to stabilize Kentucky's public pension crisis.

For decades the workers — some of whom cannot receive Social Security — have been protected by state laws that recognize their pension benefits as an "inviolable contract" guaranteeing them the benefits they earn under the plan they signed up for when hired.

But Kentucky's pension crisis has grown — the state now has at least $40 billion in unfunded pension liabilities — and, officials and workers advocates say, likely will require some sort of unprecedented and unpopular action.

Chris McDaniel, the Taylor Mill Republican who chairs the Senate budget committee, said he's not trying to scare people, but the state is at a point "where we cannot make pension payments and deliver essential services. ... It's impossible."

A think tank is recommending that lawmakers consider reducing the future benefits of current government workers — a move that advocates for those workers consider a full-out assault on their contractually guaranteed benefits.

In a recent letter to the editor published in the Courier-Journal and other newspapers, Jim Carroll, president of the advocacy group Kentucky Government Retirees, said: "We will not accept cuts to benefits promised under an inviolable contract enunciated in state law. If a bill is considered that reduces promised benefits, we will storm the Capitol with torches and pitchforks. If it is signed into law, we will litigate."

For teachers, the main concern is different. Certain aspects of the benefits they get — and consider important — are specifically exempted in law from protections and are now vulnerable as legislators look to address the pension crisis. Teachers are not eligible for Social Security benefits, as other state workers are.

For his part, Bevin said in a June 6 letter to legislators, "We have a moral and legal obligation to fulfill our pension promises to current employees and retirees."

But the governor has not released his specific proposals yet for pension reforms or tax reforms, nor has he said when the special session will be. The Governor's Office did not respond to an email and phone call seeking comment for this story.

McDaniel says it is too early to predict how lawmakers will address benefits, other than to say that a new approach will be taken to achieve savings on benefits for employees hired in the future who have no protection of the inviolable contract.

"The question is what is covered by the inviolable contract and what is not. Certain core things are definitely in, but there are a lot of things around the fringes where reasonable, expert minds differ," McDaniel said. "Do I think you will see what you would call a full-out assault on the contract? No. Do I think you will see perspective differences that result in potential litigation? Quite possibly so."

Inviolable contract

Kentucky statutes governing various public pension plans say that retirement benefits granted a public employee and teacher "constitute an inviolable contract of the Commonwealth."

But the Bluegrass Institute, which promotes free-market capitalism and smaller government, made a presentation to the Kentucky Retirement Systems Board last week that in part argued that future benefits accrued by current public employees are not protected and should be reduced as part of the solution to the pension crisis.

"Benefits that have an actuarial basis and have been earned are protected by the inviolable contract. We defend those benefits, and those cannot be cut," said Jim Waters, chief executive of the Bluegrass Institute, said in an interview. "But the inviolable contract does not cover benefits awarded that do not have an actuarial basis. ... Just because a beneficiary received a high benefit one year does not mean the system can always afford a benefit at that level. It must reflect what we can afford."

Waters emphasized that his group is not advocating a reduction in benefits of current retirees or benefits accrued to date by current employees who have yet to draw benefits.

But he said the alternative to not curbing the accrual rates of pensions of current employees is "a pension system that will absolutely consume every possible General Fund dollar at the expense of education, health care, public safety and so on."

Jason Bailey, executive director of the Kentucky Center for Economic Policy, sharply disagrees.

"Existing employees were hired with the expectation and promise that their pension benefit would be available to them if they put in the required number of years — it was part of the compensation package that attracted them to the job in the first place. To prematurely cut short that benefit mid-career would break that promise."

Senate Majority Leader Damon Thayer, R-Georgetown, said the Bluegrass Institute's proposal is "an interesting interpretation of the inviolable contract. But it's still too early to say what may or may not be considered or passed. I'll just say it's on the table."

Teachers' concerns

Clearly on the table in a special session, however, will be certain aspects of current retirement benefits that the Teachers Retirement System says are outside the protections of the inviolable contract.

Those include a benefit that boosts the average salary upon which benefits by are based by incorporating a payment for unused sick leave by school districts to retiring teachers.

Another is a provision that lets a teacher's benefit be calculated on their highest three years of salary — rather than an average of the five years of highest salary — if the teacher is at least 55 years old and has worked at least 27 years.

Stephanie Winkler, president of the Kentucky Education Association, said these aspects of the benefits are important not just to teachers, but to help schools and students because they act as incentives to keep experienced teachers in classrooms.

Winkler emphasized that teachers can't get Social Security benefits.

"On the sick leave benefit ... teachers try not to disrupt their students' education, so they come to school even some days when they're sick and probably shouldn't. ... If that benefit is done away with, more teachers will be using those sick days and schools will have to pay for more substitutes," Winkler said.

To do away with these benefits will save little or no money, she said, and could result in a mass retirement of teachers eligible to do so.

"So changing this will have unintended consequences and certainly not help the education of students and, frankly not help with the situation with pensions," she said.

But Thayer said any current benefits not covered by the inviolable contract are on the table and that reductions of such benefits "can produce significant savings over 20 years. And we are going to have to take the long view with any solution here."

While the course lawmakers will take at a special session is unclear, it is likely to be clarified somewhat this month when the PFM Group, a consultant retained by the Bevin administration to study the pension systems, issues its final report and recommendations.

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