Office of State Budget Director

284 Capitol Annex, 702 Capitol Avenue

Frankfort, Kentucky 40601

(502) 564-7300
Matthew G. Bevin Internet: osbd.ky.gov
John E. Chilton
Governor State Budget Director
Governor’s Office for Policy and Management
Governor’s Office for Economic Analysis
Governor’s Office for Policy Research

May 24, 2019 John E. Chilton

502-564-1218
MEMORANDUM
To: All members of the 2019 Kentucky House and Senate
Subject: Pension issue that needs attention – Quasi-governmental organizations

The Governor has proposed a bill that makes changes to KRS 61.522, the current
statute that allows certain employers to voluntarily cease participation in the Kentucky
Employees Retirement System - Non-hazardous system (KERS-NH). If the proposal is
adopted, it will provide budgetary relief for those employers. If the proposal is not
adopted prior to July 1, these organizations will experience a 68% increase in their
pension burden for the 2019-2020 fiscal year.
I believe that there is a general lack of clarity about what the Governor’s proposal does
and what it does not do.
What the proposal does
 The proposal affects only KERS-NH quasi-governmental employers – primarily
local health departments, local crisis centers, regional mental health agencies,
and postsecondary educational institutions.
 The proposal simply expands current law to provide four options for quasi-
governmental employers who want to cease participation in the KERS-NH
system. The options include lump-sum payments or installment payments.
What the proposal does not do
 It does not change any benefit that retired employees are now receiving.
Retirees will continue to get the same monthly checks that they are receiving
now.
 It does not change retirement or insurance benefits already earned by active
employees.
Members of the Kentucky
2019 House and Senate
May 24, 2019
Page 2 of 3

 It does not affect the Teachers’ Retirement Plan, or the KERS-H, CERS-NH,
CERS-H or State Police plans.
 It does not inhibit future consideration of changes to benefits or funding
procedures for KERS-NH or any other state sponsored retirement plan.
(However, it is important to adopt the proposed bill now, so that the actuaries can
do their work, employers can make informed decisions, and the retirement
system can make the make the necessary administrative changes in time for a
July 1, 2020 effective date.)
 There are no mandates. All options are employer options.
When might the agencies be affected?
 The 2020 General Assembly will complete its session before any organization
would make a decision regarding their preferred option. This allows the General
Assembly to make supplementary adjustments to the law and to the
Commonwealth’s budget based on what is known at that time. This bill simply
starts the process for each entity to analyze all relevant information and provides
paths for sustainability. It does not preclude legislators from making
adjustments, if needed, before these decisions are implemented.
Reasons for the proposal
Because the KERS-NH is only 12.9% funded, retirement costs for employers have
increased to such a level that many of the quasi-governmental employers simply cannot
afford the full cost.
The legislature has addressed this situation by allowing the quasi-governmental
organizations to continue their contributions at the 2017 level (49.47% of their payroll,
rather than 83.43% computed by the actuaries). This resulted in the KERS-NH plan
receiving $132 million less than it should have received in FY 2019. The contribution
percentage will likely increase in the next biennium.
The objective of the plan is to provide employers with affordable options that will provide
financial relief and will allow them to continue to provide the important services for the
Commonwealth’s citizens.
Governor Bevin’s proposal is an attempt to prevent the bankruptcy of any of the affected
agencies. As a reminder, Seven Counties filed for bankruptcy in 2014, leaving its $145
million unfunded liability behind. KERS-NH pays $6.5 million a year to Seven Counties
retirees. Because Seven Counties pays nothing, their cost is shared by all remaining
employers, not just the quasi-governmental employers.
Short of bankruptcy, higher required contributions will still lead to undesirable decisions
that will result in fewer needed services and likely layoffs off the very people we are
working to protect.
Members of the Kentucky
2019 House and Senate
May 24, 2019
Page 3 of 3

Funding issues
It is well known that many of the quasi-governmental employers simply cannot afford
the full cost of participation in KERS-NH. For this reason, in the FY 2019 and FY 2020
budgets, the legislature provided a direct subsidy to many of the financially stressed
quasi-governmental employers. (This is in addition to the one-year contribution relief
mentioned above.)
My only suggestion would be to make clear that the 2020 General Assembly will be in
session before any organization would make a decision regarding their preferred option.
This allows the General Assembly to make potential supplementary adjustments to
budgets based on what is known. This bill simply starts the process for each entity to
gather the necessary information and provides paths for sustainability. It does not
preclude legislators from making adjustments if needed before these decisions are
implemented.

It is important to note that any relief given to the quasi-governmental organizations or

the inability of these organizations to pay their share of the unfunded liability will result
in higher costs for the Commonwealth. These costs will be in the form of direct
subsidies to employers and/or increased retirement contribution rates over the long-
term.
Action needed
If the Governor’s proposal is not adopted before July 1, the pension contributions of the
118 quasi-governmental organizations will increase from 49.47% of their payroll to
83.43%. That is an increase of 68%. If that occurs, the financial viability of many of the
quasi-governmental organizations will be in question and the continuation of their
important services will be jeopardized. For this reason, all postsecondary institutions,
the mental health agencies, and the local health departments support the Governor’s
proposal.
The Governor’s proposal will deliver financial relief for the next year and will provide a
path forward. The General Assembly can then address funding and other
considerations in the 2020 session of the General Assembly.