As amended by the House, the public pension bill, Senate Bill 2, would help ensure that the state or local government employer pay the actuarial required contribution (ARC) to the public pension systems administered by the KRS, beginning in fiscal year 2014, said House State Government Chair Brent Yonts, D-Greenville. Full funding of the ARC is estimated to cost around $100 million per year in state General Fund dollars, he said.

The General Fund dollars would come from a revenue mechanism in HB 416, sponsored by House Speaker Greg Stumbo, D-Prestonsburg, and approved by the House today by a vote of 52-47. HB 416 is aimed at allowing the state to collect an estimated $73.5 million by 2019—and more in subsequent years— for a new state “pension sustainability trust fund” that would be created in fiscal year 2014 under the bill. The funding would potentially come from Club Keno and iLottery games that are expected to be offered by the Kentucky Lottery and a portion of the proceeds from instant or “historic” racing—or betting on previously-run horse races—now offered at Kentucky Downs and Ellis Park.

“After these endeavors mature, in about six to eight years, it pretty well takes care of itself from there on out,” Stumbo said.

Stumbo said HB 416 creates a potential “long-term dedicated funding source for our pension problems” while protecting state funding of the Kentucky Educational Excellence Scholarship (KEES) program. The state lottery is the dedicated funding source for KEES under Kentucky law.

Besides requiring full funding of the ARC, the House’s amended version of SB 2 would retain the current defined benefit plan in the KRS (as opposed to the hybrid shared-risk plan proposed by the Senate,) require pre-funding of cost of living raises for retirees by the General Assembly and allow the state to modify benefits and pension eligibility for future employees hired as of July 1, 2013

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In many rural counties across the Commonwealth, the public school system and state and local government are the largest employers.  Those entities provide relatively stable employment with decent wages and benefits in places where opportunities are scarce.  The citizens who take those jobs in public service often remain in their home communities upon retirement.  And just like they did when they were regularly employed, those retirees spend their pension dollars locally, supporting small businesses across the commonwealth.

Retirees need groceries, health care, prescriptions and car repairs.  They get their clothes dry cleaned, eat at local restaurants and buy gas in their hometown stations.   So although most retirees are on a truly fixed income – many have no source of income other than their KRS payments and in some cases a small social security check – they still provide a reliable, consistent revenue stream for the local economy.

One of the best economic development plans for the commonwealth is to insure that public employees have decent wages while they work and a secure, steady income when they retire.  To allow anything less than that is irresponsible.

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Though Pew Research Center generally has a solid reputation as an unbiased resource, their standing should not be conflated with that of Pew’s Public Sector Retirement Group—the division that has come to Kentucky to push its pension overhaul plan. Pew’s Public Sector Retirement Group’s (PEW) involvement with Kentucky’s pension overhaul raises a number of concerns that are relevant as the legislature considers the Task Force’s recommendations.

These serious concerns are detailed further in the memo, but include the following:

-          PEW relied on a biased consulting actuary firm that sells cash balance plans;

-          PEW made significant errors that demonstrate their lack of expertise; and

-          PEW worked with the Arnold Foundation, an out-of-state organization with a pre-determined antipathy to traditional defined benefit pension plans.

PEW received privileged treatment because of its preceding reputation, but their skewed recommendations give rise to serious concerns that accepting PEW’s proposals may be doing a disservice to the state.

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PEW has come to Kentucky with pre-determined ‘solutions’ for Kentucky’s public pension system that have little to no relation to Kentucky’s finances or its pension plans. PEW is unqualified to work on actuarial and retirement benefits and its recommendations manifest their lack of qualification.

Instead of sending an experienced and impartial actuary to Kentucky to analyze the specifics of the system and issue recommendations based on Kentucky’s unique pension system, PEW relied on a small consulting actuary firm called October Three. October Three specializes in selling a patented cash balance plan—and makes a profit for selling the plan. The firm has very limited public sector clientele and, as evidenced by their overheated marketing of cash balance pensions, are hardly objective. The biases that October Three brought into their analysis should raise a number of red flags for legislators hoping to receive a well-researched pension proposal that is best for Kentucky’s economy and its employees.

A close read of the proposals finds a number of significant errors that should concern legislators. Not only were there a number of careless mistakes such as using incorrect terminology to discuss different types of pensions, but PEW substantially underpriced its proposal—an error that could cost the state and participating employers billions of dollars, according to an independent actuary. Such errors, coupled with incomplete analysis, provides good reason for the legislature to take a step back and really think about what is being proposed in the state.

Another serious point of concern is that PEW’s work is being funded in part by the Arnold Foundation, an organization with its own ideological goals and a pre-determined antipathy to traditional defined benefit pension plans. The Arnold Foundation has its own goals of ‘fixing labor market distortions’ and adding ‘portability’—neither of which have been identified by legislators as significant issues in Kentucky. Though the Legislative Task Force on Pensions had the admirable goal of finding an effective way to address the pension funding challenges created by years of chronic underfunding, the Arnold Foundation’s bias interferes with achievement of that goal.

The PEW/Arnold recommendations put ideology over effectiveness and it is disappointing that the Legislative Task Force was misled by these out-of-state-interests. A review of PEW and Arnold’s driving interests and skewed recommendations give rise to serious concerns that accepting PEW’s proposals may be doing a disservice to the state.

Now is the time to give careful review of PEW’s policies and recommendations.

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