Nothing complicated about this pension plan

Northern Kentucky Rep. Buddy Wheatley recently described legislation aimed at bringing more fairness and stability to agencies in the Kentucky Retirement Systems as a “complicated onion.”

Wheatley, D-Covington, offered the analogy during a recent House State Government Committee meeting considering legislation addressing severe inequalities resulting in some agencies paying more – often much more – into the state’s pension system than they rightfully owe while other entities don’t contribute anywhere near their actual liability.

The agencies most negatively affected by the current arrangement are quasi-governmental groups like universities, local health departments and mental-health centers, whose very existence and work is threatened not only by the fact that they’ve long been forced to pay significantly more in pension costs than they owe but that those expenditures have increased exponentially in recent years and will continue to do so unless changes are made.

Rep. Jim DuPlessis, R-Elizabethtown, the primary sponsor of House Bill 8, noted in committee testimony that rape crisis centers currently are forced to sink half the amount of their payroll into the pension system even though they actually owe less than 30% of their pay.

But thanks to past ill-advised actions taken by the boards and bureaucrats who run Kentucky’s retirement systems, that price tag this year will jump to around 85% of payroll for many of these agencies unless they’re granted relief, which DuPlessis’ bill does.

Employers will be forced to contribute $850 for every $1,000 they pay employees unless the General Assembly addresses the situation.

Understanding the negative consequences of such a mandate on an agency committed to providing vital services doesn’t seem complicated.

Lotus, which serves as a haven for sexual assault victims and a child advocacy center in an eight-county area of western Kentucky that includes Paducah, faces the possibility of being forced to increase its pension contribution to nearly $1 million annually if some fiscal sanity doesn’t prevail.

Lori Brown, the agency’s executive director, told WPSD-TV that DuPlessis’ proposed changes would reduce Lotus’ pension obligation to 18% of its payroll, allowing more dollars to go toward providing critical services versus being forced to cut programming and staffing needed to fulfill its mission.

The proposed policy change ensures that an agency like Lotus can keep serving its region by changing the calculation of its pension costs from a set percentage of payroll to determining what it owes the system and establishing payments designed to pay off that liability in 30 years – instead of the state raising the percent KRS employers are forced to pay every couple of years.

The change is also designed to discourage employers in the retirement system from reducing their workforce in order to lower pension payments and to instead focus on what they really owe.

Supporters hope DuPlessis’ approach will prevent needed agencies like Lotus from being forced to cut back or close altogether, especially if pension costs were to come close to equaling its total payroll, while other agencies lay off workers and then rehire them as contractors to avoid paying their pension bills – an oft-played-out scenario.

It remains to be seen whether this approach will, as supporters claim, reduce the cost of using traditional employees, especially when considering the totality of future benefits they accrue, and incentivize employers and employees to stay in the system.

What’s not up for questioning, however, is DuPlessis’ assertion: “I think we can all agree: nobody wants to pay somebody else’s bill. And that’s what this legislation does: It says, ‘you’re going to pay what you owe – no more, no less.’”

Nothing complicated about that.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com and @bipps on Twitter.

The Bluegrass Beacon is a weekly syndicated newspaper column posted on the Bluegrass Institute’s website after being published by newspapers statewide.