A Primer: KY Lawmakers Pension System

What’s At Issue?

The pension and health insurance benefits paid to Kentucky’s legislators and ex-legislators have taken on a substantial financial and political air, especially since the 2005 enactment of HB 299, a pension-enrichment bill. The legislators voted themselves richer pension opportunities and gave the governor a powerful tool that may change the dynamics of the Kentucky General Assembly – and lobbying.

Why It’s Important

Three reasons: (a) Legislators have bestowed government-paid pension benefits upon themselves far in excess of the retirement benefits available to other government employees – especially when considering that being a legislator is a part-time job; (b) legislators’ retirement benefits outpace those of state and local government employees to such an extent that the legislature has seriously compromised its ability to tackle the $29.7 billion unfunded liability of the state’s other retirement systems; and (c) the 2005 legislation that opened the gate to these super-rich pensions for legislators has a serious unintended consequence – it handed the office of the governor a new tool that he and all future governors can use to sway legislators on votes and even to resign their seats. The carrot is a gubernatorial appointment to a government job that a legislator can hold for three years and boost his or her legislative pension, in some instances, more than $1 million over a lifetime.

Background

Members of the General Assembly created a retirement system for themselves in 1980. All other government entities, including judges, already had a retirement program by that time. The lawmakers modeled their plan on the judges’ retirement system, which began in 1960 with a 5 percent service credit rate (SCR), or benefit factor, as some call it.

The SCR percentage is one the three factors used in calculating the size of the pension check, the other two factors are years of service and salary.

In 1976, voters approved a constitutional amendment to re-structure the court system. That’s when the Kentucky Supreme Court was created. It also resulted in an adjustment to judges’ pensions, among which the service credit rate percentage was lowered from 5 to 4.15.

Four years later, in forming its own pension plan, the legislature chose 3.5 as its percentage factor and based its annual salary – for purposes of calculating a pension – on $27,500, which was an “assumed” figure, not actual. Legislative salaries in real dollars were considerably lower at that time.

At their very next chance, the 1982 session, legislators made their pensions richer by giving everyone who had served more than four years a 5 percent service credit rate, up from the 3.5 percent. That significantly enriched the pensions of everyone who entered the legislature during or before 1978, which, of course, included the bulk of those who voted for the change. The action became widely known as the “greed bill.”

In that same 1982 session, the legislature set the pension percentage rate for the freshman class that year, and all years to follow, at 2.75 percent – and they applied it to judges. So, right now the judges and legislators who entered service in 1982 or later have the same 2.75 percent rate.

In 1998, the legislators voted themselves an automatic second pension – not as legislators but as employees of the commonwealth – once they reached 100 percent of their legislative pension. The second pension is in the Kentucky Employees Retirement System.

Then the really big one came: In the 2005 session, the legislators made five major changes to their pensions.

1. They lowered from 30 to 27 the number of years a legislator must serve before he or she can start drawing a pension prior to age 65 without a penalty for early withdrawal.
2. Legislators who heretofore were not enrolled in the Legislators Retirement Plan, but were in another government-administered plan, were given a window in which they could transfer to the LRP by Aug. 31 of that year, making them eligible for the pension bonanza to come.
3. They lowered the salary component used in figuring a legislator’s pension, making it an average of the legislator’s best three salary years instead of the best five salary years.
4. They changed the salary component used in figuring a legislator’s pension by replacing their annual “assumed salary” with their real salary, meaning their taxable income as reported on their W-2 to the IRS.
5. Items No. 2, 3 and 4 above set the stage for the granddaddy of the changes – the reciprocity language, which says legislators who were serving in the 2005 session, and all future legislators, could now base their pension NOT on their part-time salary as a legislator but on their full-time salary from another state or local government job after they left the legislature (or before they came). The only restriction being, the pre- or post-legislative job must be covered by one of Kentucky’s other government-administered pension systems.

Judges have no such reciprocity, now the only government employees who don’t.

Anatomy of the Plan

The retirement system for state legislators, called the Legislators Retirement Plan, is one of our state’s six government-administered retirement systems.
1. Legislators Retirement Plan
2. Judicial Retirement Plan
3. Kentucky Teachers Retirement System
4. County Employees Retirement System
5. State Police Retirement System
6. Kentucky Employees Retirement System

The legislators’ and judges’ retirement systems are administered jointly under what’s called the Kentucky Judicial Form Retirement System. The funds are not co-mingled. Likewise, the county, state and state police retirement systems come under the umbrella of the Kentucky Retirement Systems, and the funds there are not co-mingled.

Each system has two funds – a pension fund and a health insurance fund.

Further, the Kentucky Retirement Systems, which is primarily for city, county and state employees, has two categories of retirees: those who work in hazardous jobs, such as police and firefighters; and those who work in non-hazardous. The rules are somewhat different for hazardous and non-hazardous jobs. Teachers, legislators and judges do not have hazardous categories.

KERS serves the vast majority of state employees, but not the state police, legislators and judges. CERS serves employees of city and county governments, including school boards, and its funding comes from the budgets of local governments (and from investments and employee contributions).

The Kentucky Teachers’ Retirement System includes teachers, of course. But it’s more than K-12. Also included are university professors and some university employees – the requirement is a four-year degree. Some legislators – those who work or have worked in the school systems or for a state university – may opt to be in KTRS instead of the legislators’ plan.

No person, however, can be enrolled as a contributing participant in more than one retirement system at the same time. A key word in that sentence is “contributing” – a whole lot of government employees have second and even third government pensions.

By the will of the legislature, knowing who is enrolled in a particular government pension system, and also who is drawing one, two or three pensions is one of Frankfort’s greatest secrets. There’s no specific law that prohibits the release of information on legislators’ pensions; instead, the Legislators Retirement Plan acts from an attorney general’s opinion and releases enough information so the public can reasonably figure out (but not exactly) what a legislator’s pension would be.

Available Information

There are a number of exemptions to the Kentucky Open Records Act, the most notable being virtually the entire judicial branch of government. Some court records, nonetheless, are open to the public. The Administrative Office of the Court provides this explanation:

Kentucky Judicial Branch and Open Records Policy

Court records are under the control of the Supreme Court of Kentucky and as such are not subject to the Open Records Act, KRS 26A.200; KRS 26A.220; Ex parte Farley, Ky., 570 S.W. 2d 617, 624-625 (1978). However, the Administrative Office of the Courts (AOC) does release information as a matter of comity when possible. These requests are considered on a case-by-case basis and are usually granted unless to do so would compromise the business of the court system. We consider many of our records public and release them accordingly when requested.

The judges’ pension plan also is somewhat of an exception here. It’s governed by the same attorney general opinion as the legislators’ in releasing pension information.

Don’t bother to ask who is enrolled or drawing a pension(s) in the teachers’ retirement system or the Kentucky Retirement Systems – the staff won’t tell you, on grounds the information is protected by state law.

The Legislators Retirement Plan and the Judicial Retirement Plan are a little looser, but they still keep such simple information as “who’s drawing a pension and when did they start” confidential.

Other information that the Legislators Retirement Plan withholds from taxpayers is, whether (and when) a legislator buys “time,” such as years served in the National Guard, government jobs, and, believe it or not, “air” time – which is exactly what it says, out of the air. After serving 15 years in the General Assembly, a legislator can buy five years of “air time,” which can’t be used until he or she reaches 20 years of actual service.

There are four parts of a legislator’s pension, however, that are subject to the Open Records law, in accordance with a 1999 Attorney General opinion (99-ORD-209), which the LRP uses as its guide.
1. The LRP can tell us whether a legislator is enrolled in its plan.
2. The LRP can tell us a legislator’s or an ex-legislator’s serve credit rate.
3. The LRP can tell us a legislator’s or ex-legislator’s high three salary.
4. The LRP can tell us the period (years) a legislator served.

That’s it. No information about “bought time,” no information that would identify who is drawing a pension or when they started drawing it.

Figuring a Lawmaker’s Pension

Pension payouts, from government-administered retirement systems, are distributed according to a three-factor formula: The number of years and months of service, average salary and a percentage figure, which for most legislators – those who came in 1982 and afterward – is 2.75 percent. Simply multiple the three factors: years x salary x percent. For example, a legislator with 20 years of service, a high-three salary of $40,000 and a percentage multiplier of 2.75 percent would draw a pension of $22,000 a year. After 36 years and about four months of legislative service, the pension is 100 percent of the $40,000 salary.

The legislators’ pensions are based on years and months of service, and each new service year begins on July 1, a date that’s only coincidental to the state’s fiscal calendar.

The salary part is the average of the highest three years, and that’s why it’s called the high three. That’s not limited to the last three years – it’s any time during the legislator’s service, even after they have reached the 100 percent threshold, or “maxed out,” and quit contributing to their legislative pension plans, or, in some cases, have started a second pension. It’s their high three in government service, which now includes positions held before, during or after service in the legislature.

Service Credit Rate for Legislators

The percentage used in figuring pension payout is a crucial element. The slightest change in the percent can meaningfully alter the pension check.

Judges and legislators who entered service in 1982 or later (the bulk of those now serving) have a service credit rate of 2.75 percent. A state employee’s rate is around 2.0 percent; there’s a slight range, and it’s lower for those employed Sept. 1, 2008 and later. County employees have a rate of 2.2 percent.

A few members of the current legislature were serving in 1978 and earlier; they have the highest SCR of all at 5 percent: Those who came in 1980 have 4.15 percent, and for those who came in 1981, it’s 3.5 percent. The rest are at 2.75.

Thresholds

There are designated years of service markers along the pension path.

1. Five years: For each five years of service, a legislator may reduce by one year drawing his or her pension before age 65 without an early withdrawal penalty. For example, after 20 years of service a legislator can retire at age 61.
2. Fifteen years: After 15 years of service, a legislator may purchase “five years of air time,” but can’t use it until he or she reaches 20 years of actual service.
3. Twenty years: After the completion of 20 years, the retirement plan pays 100 percent of the health care insurance costs for the lawmaker, his or her spouse and dependent children.
4. Twenty-seven years: After 27 years of service, legislators may start drawing their pensions at any time before age 65 without an early withdrawal penalty.
5. Thirty-six years: After 36 years and about four months, a lawmaker with a SCR of 2.75 can retire at 100 percent of his or her high three salary. (Those with a 5 percent SCR reach that milestone in 20 years; those with a 4.15 in 24 years and about one month; and those with a 3.5 in 28 years and about seven months. By comparison, a state employee with a 2 percent SCR would have to work 50 years for his or her pension to be 100 percent of their salary.)

Retirement Age

At age 65 legislators may start their legislative pension without an early withdrawal penalty. They can begin drawing their pensions any time after they leave the General Assembly, but the dollar value of a pension is reduced 5 percent for each year that’s early – except, there is no early withdrawal penalty for those who have 27 years of government service. After 27 years of government service, which includes service in any of the state’s six government-administered retirement plans, there are is no age restriction on legislative pensions.

The Second Pension

Once a legislator completes enough years in the General Assembly to max out (draw 100 percent) of the legislative pension, a second pension is started automatically for him or her in the Kentucky Employees Retirement System. The authority for the automatic double dipping is in KRS 62.680(3), written by former state Sen. Albert Robinson, R-London, in the 1998 session.

Today, seven lawmakers have a second pension going: State Sens. Walter Blevins, D-West Liberty, and David Boswell, D-Owensboro; state Reps. Tom Burch, D-Louisville; Danny Ford, R-Mt. Vernon; Jody Richards, D-Bowling Green; Tom Riner, D-Louisville; and Greg Stumbo, D-Prestonsburg. An eighth legislator, state Rep. Harry Moberly, D-Richmond, dropped his second pension at KERS so he could enroll in the teachers’ retirement system through his university employer, a move that will substantially increase his General Assembly pension, in accordance with the 2005 session changes.

Post- or Pre-legislative Jobs

In the 29-year history of the pension system for legislators, no amendment to increase benefits has been more substantial than the “reciprocity” provision that legislators adopted in 2005. They changed the law to allow themselves to base their General Assembly pension not on their salary as a legislator but on their salary at a job they held before or after they came to the legislature – the caveat being, the external job must be in government.

Since being a legislator is part-time and the other government jobs are full-time, the math is pretty simple: the annual salary at the full-time job is greater and, therefore, the legislator’s pension check is larger. In some cases, it’s really larger.

100 Percent Health Care Coverage

Health care cost is a major concern for citizens, except for citizen-legislators once they reach the threshold of having served 20 years in the General Assembly. Beyond that time, for the rest of their lives, the legislators’ retirement package pays 100 percent of the health care insurance premiums for legislators – and for their spouses and dependent children – except when Medicare starts at age 65 for the legislator. Then, the retirement plan pays only the supplement insurance premiums.

And legislators are not bare on the front end. The insurance premium payment is graduated. After the completion of four years in the legislature, the retirement plan pays 25 percent of the legislators’ health insurance premiums; after 10 years, it goes to 50 percent; and then coverage increases in increments of 5 percent each year, reaching 100 percent at the end of 20 years. This is related to buying five years of “air” time after a legislator has served 15 years, but can’t use until after 20 years.

Only lawmakers and the state police have this 20-year health care insurance benefit.

Restrictions

1. A legislator cannot be enrolled in two government-administered retirement systems at the same time.
2. A legislator’s pension from service in the General Assembly cannot be greater than 100 percent of his or her high three salary.
3. A legislator cannot begin drawing his or her pension prior to the age of 65 without an early withdrawal penalty, except it can be drawn anytime if the legislator has 27 years of government service. Also, the start date is reduced one year for each five years of service.
4. Once a legislator starts drawing a General Assembly pension, he or she is no longer eligible to enrich the pension from employment in another government job.

Other Points

1. Of the 138 current legislators, nine have had a break-in-service. One served a term as commissioner of agriculture (state Sen. David Boswell, D-Owensboro), another as attorney general (House Speaker Greg Stumbo, D-Prestonsburg), and so on. A break itself does not disrupt any retirement benefits for service in the legislature. The pension is based on the total number of years served in the legislature. Even if there were a break in service, the enhancements enacted in 2005 would still apply, because the pension is based on the number of years accrued in the Legislators Retirement Plan as a contributing member.
2. A legislator becomes “vested” (can thereafter draw pension benefits) after five years of legislative service or eight years of total government service. That is, a legislator with only two years of legislative service – one term in the House of Representatives, for instance – will draw a pension if he or she had at least six years of total government service, but the pension would be figured only on the two years in the legislature.
3. Legislators who have had a break in service and worked in a government job during the interim and who later are re-elected to the legislature may transfer the years of service in the interim government job to their legislative retirement plan, but they may have to pay a stiff penalty based on an actuarial assessment of the liability of the transfer – the amount it would cost the Legislators’ Retirement System in higher pension payouts to the individual. Ex-legislators cannot transfer years of service, but they can, however, make the transfer once they are re-elected and are contributing to the Legislators Retirement System.
4. Each of the state’s retirement systems calculates its pension benefits based on the number of years of service in its own system.
5. Only legislators have a high three. Judges and all other government employees have a high five.

Liability

About 20 percent to 25 percent of the payout for retirement benefits for legislators comes from funds appropriated to the Legislators Retirement Plan by the General Assembly. Legislators contribute 5 percent of their salaries, which comprises roughly 5 percent to 10 percent of the retirement fund’s annual $45 million budget. The rest comes from investments. As of July 1, 2008, the LRP had a $1.8 million surplus. However, this past year has been a difficult one for return on investments; an actuarial report on FY 2009 is expected to show an unfunded liability.

By Lowell Reese
Kentucky Roll Call
Sept. 22, 2009