Legislators anticipate reform of the Kentucky Retirement System will emerge as the top issue once the legislative redistricting is completed in the next session of the General Assembly.
"As the public becomes more focused on the debt created by the unfunded pension system combined with local governments struggling to provide services because of high pension costs, next year will be the time for significant pension reform," said Damon Thayer, R-Georgetown, who introduced legislation last session to reform the pension system and plans on doing the same next session.
Covington's pension costs played a major role in the city budget passed at the end of June that may lead to the layoffs of up to 25 employees in the next week, said City Manager Larry Klein. Covington must absorb a $700,000 increase every year in its pension costs, he said.
"Because of these increased pension costs, which our employees can't control, we can't give big pay raises," Klein said. "The state needs to step up. It is literally putting city governments and counties in a position where we can't provide services."
Actuaries with the KRS set the rates local governments pay to cover costs.
Pensions costs cities 35.7 cents for every dollar earned by police officers, firefighters and other hazardous duty employees and 18.9 cents on every dollar for non-hazardous duty employees, said J.D. Chaney, director of governmental affairs for the Kentucky League of Cities. That is double the rate for police and fire compared to 10 years ago and almost triple the rate for non-hazardous as stock market losses and health care costs mounted, a recent audit of the retirement system showed. If gone unchecked, the pension rates for police and fire will increase 50 percent in the next 15 years, Chaney said.
This will mean less police, firefighters and road crews in cities if nothing is done, Chaney said.
"That is predicted, with no end in sight," Chaney said. "Cities will be forced into a situation to reduce the number of hazardous-duty employees or look at alternative forms of employment in order to meet that statutorily mandated demand. They may be forced into raising taxes to get resources to meet that demand."
Pensions weigh heavily on the minds of local leaders like Newport Mayor Jerry Peluso. Either the state fixes the problem or cities will have to lay off more police and fire, he said.
"There's no way to pay for that increase," Peluso said. "Unless a pot of gold falls onto city hall from the sky, you can't increase revenue fast enough."
The state pension system handles $13 billion in assets for 330,000 active and retired members. This includes a system for state employees and a system for local government employees.
The state's retirement system guarantees a level of benefits for employees based on a formula that includes years of service and highest average compensation. Thayer and Senate President David Williams, the GOP gubernatorial candidate, favor changing the state retirement system to a 401(k) style plan where the level of benefits change based on the money the money paid into the system and return on investments.
It is the No. 1 internal fiscal problem in the state, Williams said.
"It will destroy county governments, city governments and state government if we don't do something about it," Williams said in a recent speech to county judge-executives assembled in Northern Kentucky. "We should have done it 3 ½ years ago and every day that passes by digs our hole deeper and it will consume every dollar that you need to provide all the basic services in your county."
Williams and Thayer sponsored last year Senate Bill 2, which would have changed Kentucky Retirement Systems to a 401(k)-style plan for new hires and no longer require the cities to fund 100 percent of the pension liabilities. Instead, cities contributions would only have to fund 85 percent of the pension liabilities.
The bill passed the state senate but didn't get past the state house. Some legislators had concerns that creating two pension systems - one for the current and former government employees under the old pension plan and another for the new employees - would bankrupt the old system and cities because new employees are no longer paying into it.
"That would create a hardship for local government, not putting people into the old system," said State Rep. Arnold Simpson, D-Covington.
Simpson, however, agreed that pension reform is a top priority.
Thayer said he will re-introduce a similar bill to Senate Bill 2 in the next session of the General Assembly.
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