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First Recommendations Made to Reform Kentucky's Pension Systems

The Public Pension Oversight Board has made its first set of recommendations to reform the Kentucky Retirement Systems.

The 13 recommendations – that range from providing more transparency to using more tax dollars to fund the systems – were adopted at the oversight board’s meeting on Monday. The recommendations will be included in a yearly report that the oversight board is expected to consider at its Dec. 15 meeting.

The state retirement systems serve more 334,000 active, inactive and retired members. It has $14.5 billion in assets but is still underfunded and is facing more than $17 billion in unfunded liabilities due to investment losses during the recession and years of underfunding from the state, according to the retirement systems.

Five of the recommendations are administrative in nature and could reportedly be adopted without legislative action. The other eight recommendations would require action in the 2015 Regular Session of the General Assembly. Many of those legislative recommendations are already contained in bills pre-filed by legislators on the oversight board. Other recommendations were introduced in legislation during the last General Assembly but did not become law.

One legislative recommendation addresses a practice known as “pension spiking” – a process whereby employees inflate their compensation in the years immediately preceding retirement in order to receive larger pensions than they otherwise would be entitled to receive.

Two more recommendations tackle the underfunding of state pensions. One of those calls for the General Assembly to secure additional funding to avert any insolvency issues facing the retirement systems. The other calls for measures to be taken to specifically improve the cash flow issues facing the non-hazardous employees pension fund.

Rep. Brent Yonts, D-Greenville, acknowledged the funding recommendations were vague, but said there were “tweaks” that state officials could make to improve the cash balances of the systems. For example, Yonts said Kentucky could give the pension systems the $200 million in additional sales taxes it is expected to collect through the Marketplace Farness Act of 2013. The federal legislation grants states the authority to compel online and catalog retailers, no matter where they are located, to collect sales tax at the time of a transaction.

Two other recommendations address what agencies can participate in the retirement systems. Those recommendations were prompted after a nonprofit Louisville-based mental health agency filed bankruptcy last year to avoid escalating pension contributions that it claims would soon drive it out of business.

Another recommendation would expand the duties of the oversight board to include the Kentucky Teachers’ Retirement System, Legislators’ Retirement Plan and the Judicial Retirement Plan.

From the Legislative Research Commission