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Kentucky's New Pension Law Marks Unprecedented Reforms

Critics say it could weaken the state's retirement system, which is already the worst-funded in the nation.

Kentucky Gov. Matt Bevin signing a pension relief bill on Wednesday.
Kentucky Gov. Matt Bevin signing a pension relief bill on Wednesday.
(AP/Bruce Schreiner)
After several failed attempts and a special legislative session, Kentucky -- the state with the worst-funded pension system -- now has a plan to ease the financial burden that employees' retirements are taking on quasi-governmental agencies.

In signing the pension reform bill on Wednesday, Republican Gov. Matt Bevin said it provides "much needed financial relief" and "a viable path forward for our mental health agencies, rape crisis centers, local health departments and other community agencies." 

But opponents of the new law warn that the controversial changes could worsen the state pension plan’s already precarious finances.

The bill freezes the pension payments for quasi-governmental institutions for another year, essentially allowing them to pay half of their bill until it significantly increases after 2020. And in an unprecedented move, the law allows those agencies to leave the state's pension system and pay off their debt, with interest, over the next 30 years; those agencies can also now move employees hired after 2013 out of the state retirement system. 

Pension advocates say the new law threatens the solvency of the $2.7 billion Kentucky Retirement System and will likely leave it waiting decades to get the money it's owed. The state employees' plan is already one of the worst-funded in the nation, with just 16 percent of the assets it needs to meet its expected liabilities.

Bridget Early, executive director of the National Public Pension Coalition, says the legislation builds on years of state changes that have weakened the system.

“Instead of finding a way to get money into the system, they’ve all focused on benefit cuts,” she says. “That ultimately removed needed contributions.”

The bill was pushed for by presidents of the state’s regional universities, who say that increasing pension costs are squeezing their budgets and forcing them to raise tuition.

A similar bill passed the legislature during the regular session, but it contained extreme conditions that could have led to retirees not getting pension checks. Bevin vetoed it and called a special session to address the issue.

The state’s 118 quasi-governmental agencies can start leaving the Kentucky Retirement System in April. If they do, they have to provide other options for their employees, such as a 401(k) -- but they don't have to continue contributing money toward their retirement.

Most observers expect the law to be challenged in court, most likely by state Attorney General Andy Beshear, a Democrat and frequent Bevin critic who is running against him for governor.

In the meantime, there are eight months, a governor’s election and the better part of a legislative session until agencies are eligible to exit the retirement system. A lot could change.

“They didn’t do anything draconian that starts right now,” says Brian O'Neill, a spokesman for the Kentucky Public Pension Coalition. “There are still opportunities to work on this.”


In Other Public Finance News:


University of Alaska Declares Financial Emergency

Alaska’s flagship university system has declared a form of financial emergency that allows it to make layoffs and drastic spending cuts. The rare move follows Gov. Michael Dunleavy's unexpected decision to slash 41 percent of the system’s funding in June.

In a 10 to 1 vote in favor of declaring "financial exigency," the University of Alaska’s board of regents said it does not have enough money to get through the current budget year that began this month.

"We will not have a university after February if we don’t make a move,” Regent Gloria O’Neill told The Washington Post.

The university system had delayed the vote by several weeks in the hopes that the legislature would override the governor and restore funding. That effort failed. Meanwhile, the university's credit rating was downgraded three notches to Baa1.

Dunleavy, a first-year Republican governor, used line-item vetoes to cut more than $400 million from the state's budget in an effort to curb what he sees as excessive state spending.


Puerto Rico Governor Resigns

After two weeks of historic protests, Puerto Rico Gov. Ricardo Rossello announced his resignation on Wednesday.

Effective on Aug. 2, the governor’s resignation comes after massive fury following the publication of profane and misogynistic text messages between him and his aides about political enemies and Puerto Rican citizens.

The event adds to the fiscal uncertainty for the commonwealth as it struggles to recover from two devastating hurricanes and a record bankruptcy. A spokeswoman for the protesters said they were setting their sights now on the financial oversight measures (referred to as Promesa) that were put in place by Congress in 2017 to allow Puerto Rico to restructure its $70 billion in debt.

“The schemes revealed in the chats question the legitimacy of all the old institutions,” Rosa Segui, spokeswoman for the Citizens Victory Movement, told the Bond Buyer. “Now our demands include the repeal of Promesa and the abolition of the fiscal board.”

Still, some observers argue the turmoil may strengthen the ability of the federal oversight board (FOMB) to push through planned debt restructurings and other reforms.

“The current scandal thus does much damage to the governor’s political party while encouraging the opposition and U.S. Congressional Democrats to tap the power of the protests by hardening their platform vis-à-vis spending austerity [and] the FOMB,” writes Municipal Market Analytics partner Matt Fabian.

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Liz Farmer is a former GOVERNING fiscal policy writer.
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