BRADENTON, Fla. – Officials in Kentucky outlined plans to restructure the state's deeply underfunded pension systems in the coming weeks, a move that will bring the Republican-led Legislature back to the capital in Frankfort for a special session.

Gov. Matt Bevin said a voluminous bill will be released, though he did not say when, detailing a new structure for all of the state’s retirement plans that will “do what is legally and morally right” for new and current employees, as well as retirees.

Kentucky Gov. Matt Bevin
Kentucky Gov. Matt Bevin said he worked with top legislators and stakeholders to devise a plan to save the state’s pension system. Bloomberg News

“The bottom line is it’s going to come at a cost to the taxpayers for the years to come but we are going to manage the cost,” Bevin, a Republican, said at a press conference Wednesday.

Lawmakers will decide where to find the money to fund the plan, he said. A major change that will be proposed is a statutory requirement that the state pay the actuarially required contribution every year, over 30 years, Bevin said.

Lawmakers have not done that in part because of a formula written into state law that does not match the ARC payment determined by actuaries. That is one reason why analysts have said Kentucky’s public pension system is among the worst-funded in the country.

The plans had $62.3 billion of combined unfunded liabilities as of June 30, 2016.

Bevin said the reforms, which include placing newly hired, non-hazardous duty employees and teachers into 401(k)-style defined contribution plans, will require the state to pay more than the $1.2 billion that lawmakers set aside for the ailing pensions in the fiscal 2017-2018 biennial budget.

By some estimates, the cost could be as high as $2 billion but no information has been released about where state officials intend to find the revenue.

Bevin said he would not release all details at this time. However, he did say that the reform measures will be enacted over three or four years. The governor said he held meetings with various stakeholders and organizations representing the retirement plans for weeks.

House Speaker Jeff Hoover, R-Jamestown, and Senate President Robert Stivers, R-Manchester, appeared at the press conference with Bevin and said they are determined to deal with the complex pension problem.

“This plan is long overdue but it gives Kentuckians a strong foundation for a sustainable, solvent public pension system,” Hoover said. “We’re going to do what we have to do because failing to act will result in this public pension system in Kentucky – which is already one of the worst funded public pension systems in the country – to go bankrupt and this is simply not an option for us.”

For current workers there would be no increase in the retirement age. Their defined benefit plan would remain intact until they reach retirement eligibility at 27 years of service.

For retirees, there would be no clawback of pension benefits as recommended by PFM, which the state hired as a consultant. Healthcare benefits would also be protected. Current and future hazardous-duty employees would continue to participate in the same defined-benefit programs they are in now.

All legislators would be moved into the same defined-contribution plan as other state employees.

If passed during an upcoming special session that Bevin said he would call, the pension changes would go into effect July 1, 2018.

“The Commonwealth of Kentucky has been downgraded repeatedly by different rating agencies in recent years because of this looming pension crisis,” Bevin said. “This will stop the bleeding.”

Moody's Investors Service cut Kentucky’s issuer rating to Aa3 from Aa2 in July.

In January, S&P Global Ratings revised its outlook on its A-plus issuer credit rating and other Kentucky debt to negative from stable. On Thursday, S&P said if the state does not follow through with pension reform its costs are projected to increase nearly $700 million in fiscal 2019, pressuring the state's already-strained budget.

The Kentucky Retired Teachers Association said in a statement that the association appreciated the state’s willingness to keep their commitment to retired educators under the plan laid out Wednesday.

“However, it is unclear how the proposed reforms could possibly be enacted in a way that is legal and financially sound,” the statement said. “Based on the outlined provided, the math just doesn’t seem to add up.”

The Bluegrass Institute, a conservative organization that includes businesses, said it was disappointed that lawmakers apparently didn’t address the state's practice of increasing benefits and then applying them retroactively. The Institute said those practices helped drive up unfunded liabilities in the major retirement plans and there likely will be “no safeguards against the same kind of actuarially and financially irresponsible practices in the future.”