Rep. Darryl Owens Announces House Bill 1 - State Employee Pension Reform - Is Now Law

June 27 - Both chambers of the Kentucky General Assembly this week passed House Bill 1, the first step in ensuring the long-term financial stability of the state's employee pension system. Governor Steve Beshear signed the bill into law on June 27, 2008.

For more than a year we have wrestled with pension reform and sought solutions that would protect public servants and minimize the burden on our taxpayers.

Since the 2007 Legislative Session, the House has worked hard to understand the problem, even engaging the services of an expert actuary. With his help, we built a database of excellent analysis which has guided all parties in drafting House Bill 1.

We focused on the twin pillars of long-term financial stability and fairness to state employees, teachers, police officers, firefighters, and other public servants.

We also addressed the concerns of local governments struggling to pay their existing obligations to the system. They have received significant and immediate budgetary relief as well with House Bill 1.

House Bill 1 constitutes a major break with the past.

Newly hired state employees will work longer before they can retire with full or partial pension and health care benefits. The practice of double-dipping is over. Future cost-of-living adjustments will be scaled back to a more affordable level.

The effect of these major structural reforms will be immediate and far-reaching and the structural changes within House Bill 1 will prevent the system from going bankrupt.

Of course, we realize that these changes - while monumental in scope - are only the beginning, and that a number of ideas for further changes still need additional study.

The Governor has created work groups that will proceed with this additional analysis. Those work groups are made up of the same folks who helped bring about the passage of House Bill 1 including legislators, executive branch personnel, pension experts, state retirees, and city and county representatives.

It took us a long time to get to this special session and House Bill 1, but true reforms should not be rushed, especially when we are working toward ensuring financial security for the valued employees of our Commonwealth, teachers and classified employees, and public safety officers.

More details about House Bill 1 are below:

HB 1 Talking Points

Five things to know:

The House led the way. House Bill 1 uses House Bill 600 from the 2008 Regular Session as a foundation, but it is even better than that original proposal, because of bipartisan efforts. HB 1 passed on Wed. by a vote of 98-0 and is expected to be passed overwhelmingly in the Senate on Friday.

HB 1 mainly affects employees hired after Sept. 1st. That includes state and local government employees and classified school personnel (cafeteria workers, bus drivers, janitors, etc.). New teachers hired after July 1st will see more minor changes.

This special session is necessary: The 30-year unfunded liability stands at $26 billion, and is growing by $800 million a year. Waiting until 2009 would cost the state hundreds of millions of dollars in the long run, versus $300,000 for this special session. If we do nothing, experts say the system would run dry in 10-15 years, causing a severe hardship and/or high taxes to cover the retirement costs. HB 1 stabilizes the system, but it will not erase the liability; only increased employer contributions and better investment returns will do that. HB 1 has a funding schedule to bring us to full funding by 2025.

Cities, counties, and school boards will benefit immediately: For the upcoming year, their contribution rate will be lowered, resulting in a one-year savings of nearly $56 million. (For school boards, this savings is for classified workers only)

Current state and local government employees will see two key changes: A different COLA, and no more double-dipping for returning retirees, who in many cases will have to wait longer to return.

Current Employee Changes:

Different COLA: In July 2009, the cost-of-living adjustment (COLA) will be set at 1.5 percent, the same rate teachers have had for years. This can be raised by future General Assemblies, however, but only as long as the added COLA is funded at that time. Currently, COLAs are based on the Consumer Price Index.

No “double dipping”: Current employees who want to retire and return to work in state or local government will see new limitations after Sept. 1. For those in non-hazardous positions, they will have to wait three months instead of the current one before they can return. They also will be barred from starting a new retirement. Instead, a returning employee will continue drawing retirement and the new paycheck. The employee will not have to contribute to the retirement system, however, so that could be comparable to a 5 percent raise.

There is one exception to this rule: Hazardous duty workers will only have to wait one month rather than three before returning, but only if the second job is also classified as hazardous duty. For example, this would cover a retiring Kentucky State Police officer wanting to become a sheriff’s deputy. There would still be no second retirement.

Changes for NEW employees (Non-hazardous):

State and local government employees (and classified school workers) hired after Sept. 1st will continue paying 5 percent of their salary to retirement, which will be refundable, but they will also have to pay 1 percent into a non-refundable health plan.

The earliest they can retire with full benefits is 57. They must also meet the “Rule of 87,” which says their age and years of service add up to that figure. They can also receive unreduced retirement at age 65 with five years of service, or a reduced retirement at age 60 with 10 years of service. Current employees can retire with full benefits once they have 27 years of service, no matter their age.

The multiplier used in determining retirement for NEW employees will depend on their years of service. Current employees base their retirement on 2 percent a year for every year they work. These new employees, however, will have a sliding rate that increases the longer they work. Those with less than 10 years of service will have a multiplier of 1.10 percent. Those with more than 26 but less than 30 years will have a 1.75 percent multiplier. ONLY those years over 30 will be eligible for the 2 percent multiplier.

How this works: An employee hired after Sept. 1 works for 35 years, and his final five-year average salary is $80,000. For these first 30 years, his retirement will be based on a 1.75 percent multiplier, netting him $42,000 annually. Those extra five years will be calculated with a 2 percent multiplier, increasing his annual retirement to $50,000. Under current rules, his annual retirement would have been $56,000.

Other items of note:

New employees will have to work at least 15 years to be eligible for medical insurance, versus the current 10-year rule.

No service purchases can be used to retire early.

Their final average compensation must be based on their final five full fiscal years. Comp time is NOT included. Current employees only must have 48 months, and they can include comp time payments in their final average compensation.

Sick-leave payments at retirement are limited to 12 months when calculating retirement benefits. Sick leave cannot be used to retire a year early.

Changes for NEW employees (Hazardous):

They will continue to contribute 8 percent to their retirement, just as current hazardous-duty employees, but they will also pay the non-refundable 1 percent to a health insurance fund.

They will have to work 25 years for full retirement, versus the current 20. They can retire whenever they reach that new total, no matter their age. In other words, there is no “Rule of 87” for new hazardous-duty hires. They can receive an unreduced retirement at age 60 with five years of service, which is currently 55 years of age with five years of service. Like current hazardous-duty employees, they can receive a reduced retirement at 50 years of age with 15 years of service.

Their retirement multiplier also is based on a sliding scale. With 20 to 25 years of service, the multiplier would be 2.25 percent. That increases to 2.5 percent when the service is above 25 years. Unlike non-hazardous duty employees, this multiplier would cover all years of service, not just those above 25.

Their retirement will still be based on a “high three” average salary, but it must be a full 36 months.

Like new non-hazardous employees, it will take 15 years to qualify for medical insurance versus the current 10. Additionally, sick-leave payments will also be limited to 12 months when calculating retirement benefits.

Changes for New Teachers (hired after July 1st)

Teachers currently have to pay 9.105 percent, which is refundable, into retirement and 0.75 percent into a non-refundable health fund. Teachers hired after July 1st will still pay the same retirement rate, but their health-fund contribution will rise to 1.75 percent. New university teachers will also pay the same to their pensions (7.625 percent), but will also see their non-refundable health insurance fund rise to 1.750 percent.

These new teachers will still base their retirement on highest five years of earning, or their highest three if they have 27 years of service and are at least 55. Unlike current teachers, however, they will NOT be able to use comp-time and vacation days in their final retirement compensation.

Their retirement multiplier will be somewhat lower for new teachers who do not reach full retirement. Those with 30 or more years teaching will still get a 3 percent multiplier.

New teachers will have to work 10 instead of the current five years to retire with reduced benefits. The penalty on reduced benefits increases from five to six percent for each year short of unreduced retirement.

Like every other new state and local government employee, they will have to work 15 years to qualify for health insurance.

EXISTING TEACHERS will get an extra option if they decide to return to the classroom after retiring. They can waive their retirement at that point and add to their years of service, as if they had never retired. When they retire a second time, their benefit will be calculated using all of their service, not just the years they worked after the first retirement.

For those curious why July 1st was chosen for teachers and not Sept. 1st, it is because new teachers will already be working in Sept., so if we did not include them immediately, it would be another year before KTRS could participate.

Other items:

House and Senate leaders have agreed to create a subcommittee of State Government to provide legislative oversight. For example, there may be ways to increase retirement investment returns so they are close if not above the average of other retirement systems. Since the retirement systems (including KTRS) have $30 billion in assets, even a 1 percent increase in returns would bring in $300 million more.

HB 1 is expected to substantially reduce the annual growth of the unfunded liability. That, coupled with increased employer payments as outlined in the bill, will ensure the solvency of the retirement systems.

A working group formed by Governor Beshear is studying such unresolved issues as what other changes might need to be made and whether classified school employees should remain in the system covering city and county employees or be placed in another system.