Sponsors say Kentucky pension bill will unravel state's biggest fiscal crisis

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Four Kentucky senators filed a public pension bill they said would turn around the state's biggest financial problem.

Senate Bill 1, a 289-page measure, will be heard first by the Senate Committee on State and Local Government. A hearing date hasn’t been set. Lawmakers said an actuarial analysis of the bill will be released to the public before they vote on it.

The bill was filed Feb. 20 by Joe Bowen, R-Owensboro, Robert Stivers II, R-Manchester, Christian McDaniel, R-Latonia, and Damon Thayer, R-Georgetown.

“It took a long time to dig this hole we’re in, and it’s going to take a long time to dig our way out,” Bowen said as he presented the bill. “Future generations of Kentuckians are counting on us to get this right.”

Bowen also said that SB 1 “unravels the biggest fiscal crisis Kentucky has ever faced.”

Kentucky’s eight pension plans had $62.3 billion of combined unfunded liabilities as of June 30, 2016, leading some to consider the state’s plans some of the worst-funded in the nation.

Gov. Matt Bevin hasn’t weighed in on the legislation, which differs significantly from a plan he backed last fall.

SB 1 does not require new state workers and teachers to participate in a 401(k)-style plan, as Bevin would. It also eliminates a 3% contribution for health-care benefits proposed under Bevin’s plan.

Under SB 1, new teachers would be placed into a hybrid cash-balance plan and cost of living allowances would be cut to 0.75% from 1.5% for the next 12 years.

The plan would fully fund public pensions and eliminate unfunded pension liabilities over several decades, according to the sponsors.

The bill will probably be a heavy lift politically as the state grapples with an austere budget and a trend of revenue shortfalls that are “further eroding the state's resources and placing negative pressure on the rating,” said S&P Global Ratings analysts Timothy Little and Carol Spain.

Bevin has proposed a $22 billion budget for the next two years in an effort to meet required pension contributions without proposing new revenues, while the state finds itself in a “precarious position” of missing revenue estimates, they said.

“As revenues remain below estimates, growth misaligns with expenditures, and pension costs escalate, Kentucky finds itself in a difficult position where achieving structural balance is challenging,” the analysts said. “S&P Global Ratings continues to view the state's ability to fund these obligations within a structurally balanced budget as a key consideration for the future of the state's credit quality.”

S&P maintains a negative outlook on Kentucky’s A-plus issuer-credit rating due to the state’s outsized pension liabilities and budget imbalance.

For the general fund, S&P analysts said Bevin’s budget provides $3.3 billion over the biennium for pension funding, or 14.8% in fiscal 2019 and 14.3% in fiscal 2020 of proposed budgeted expenditures compared with 13.8% and 13.2% of spending in fiscal years 2017 and 2018, respectively.

Bevin’s proposal relies on significant expenditure cuts and no new broad-based revenues to fully fund required pension contributions, they said. The budget includes 6.25% across-the-board spending cuts and eliminating 70 programs to fund the increase.

“If adopted, the expenditure reductions will be felt across all levels of government, including local school districts and higher education institutions,” the analysts said. “The state estimates $385 million in savings for each fiscal year.”

The state, which has received a Medicaid waiver to implement programs such as work requirements, did not include projected savings in the budget.

“While the state has options to address its budgetary stress, there are no easy paths forward and the governor's proposal is likely to face resistance,” the S&P analysts said.

The pension reform bill the four senators introduced last week faces its own challenges.

“The uncertainty surrounding the governor's austere biennium budget proposal, pension reform, and recent revenue shortfalls underscores the difficult task the commonwealth faces in structurally aligning its budget,” S&P said.

Kentucky’s legislative session is scheduled to end around April 15.

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