Pension law's reversal spurs sudden Kentucky special session

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Four days after the Kentucky Supreme Court struck down massive changes to the state's pension system, Gov. Matt Bevin called lawmakers into session to reconsider the legislation.

On Dec. 13, the state Supreme Court unanimously upheld a circuit court ruling that found Senate Bill 151, the pension legislation, to be unconstitutional because the bill didn’t receive the required three readings before passage and for failing to get 51 votes in the House as required for a bill that appropriates money or creates a debt.

Bevin, in a brief announcement just four hours beforehand, said lawmakers would begin an emergency session Monday night to pass new bills, in part, because he had already been contacted by rating agencies about the Supreme Court’s ruling and its impact on the state’s pension plans.

“It is our expectation that will not result in good news for Kentucky,” Bevin said of action he believed rating agencies might take. “We are already one of the worst credit-rated states.”

In May, S&P Global Ratings lowered Kentucky’s issuer credit rating to A from A-plus and cut the ratings on the state’s appropriation-backed obligations to A-minus from A, “due to increased budgetary strain from rising costs associated with pension obligations within a constrained revenue-raising environment.”

Siting similar reasons, Moody’s Investors Service in July 2017 downgraded the state’s issuer rating to Aa3 from Aa2 and its appropriation bonds to A1 from Aa3.

The combined unfunded liability for the Kentucky Retirement System, the Teachers’ Retirement System, and the plan for judges and lawmakers totals $37.97 billion this year, according to a report pension officials provided to a legislative committee in November.

Bevin signed SB 151 in April. It shifted newly hired educators into a hybrid “cash balance” plan instead of the existing defined benefit plan, made them ineligible for coverage under the state’s inviolable contract, and increased the retirement eligibility age for new teachers to 65 from 60.

Changes to the Employee Retirement System and the County Employee Retirement System included creating an optional defined contribution plan, suspending compensation for equipment and uniforms, and ending the ability of workers to convert unused sick leave into service credit to increase pension benefits.

As originally filed, SB 151 dealt with sanitary sewers, but late in the session the bill was stripped of that language and replaced with 291 pages dealing with pensions. Its first readings occurred when it was still a sewer bill.

Moody's Investors Service said in May that SB 151 would provide “credit-positive pension reforms” that would reduce the state’s exposure to investment performance and risks across key funds even though it would result in higher costs for employers.

Shortly after Bevin signed the bill, Kentucky Attorney General Andy Beshear filed a lawsuit in an attempt to block it from becoming law.

Beshear said the Supreme Court ruling “voids the illegal cuts” to the retirement plans and because of the decision “an 11-page sewer bill can never again be turned into a 291-page pension bill and passed in just six hours.”

In addition to striking down the bill, justices said their ruling does not address “the substantive issues of whether the legislation violated the inviolable contract status afforded to state pensions” under the state’s constitution or whether it violated a prohibition against the impairment of contracts.

Bevin responded to the ruling the same day criticizing Beshear and the justices, whom he said had improperly supplanted their powers over the executive and legislative branches of government.

“The only chance we have for those working toward retirement is to change the system going forward,” he said Monday, as he called lawmakers into session.

House Bill 1 has been filed with language similar to the bill that was struck down. House Bill 2 has been filed to phase in higher contribution rates to the pension funds by cities, counties and school boards.

The bills are going through various committees this week, and a final vote could take place by Friday.

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Pension reform Lawsuits Public pensions Matt Bevin State of Kentucky Kentucky