FRANKFORT — States have a hard time making changes to their public pension systems. That’s because public pensions in nearly all states — 41, as of 2014 — are contractual obligations that the courts have ruled must be met.
In Kentucky, the contract we have with our public employees, teachers and retirees is called an “inviolable contract.” It is written into law to clearly protect retirement benefits of state workers hired before Jan. 1, 2014 and most teacher retirement benefits. Benefits cannot be reduced or impaired “by alteration, amendment, or repeal.” That’s what the law says, and, at least until now, no one has challenged it.
That doesn’t mean it can’t or won’t be challenged. If the Kentucky General Assembly passes legislation to reduce or in any way alter the benefits promised to employees, teachers or retirees under the legal contract we have with them, it’s almost guaranteed that legislation will end up in court. That’s been the case in at least 34 states where courts have ruled going back 70 years that public pensions are intended to have contractual obligations, even if a contract is not expressed as law.
Kentucky is not alone in our pension dilemma. “Nearly every state has enacted some type of public pension ‘reform, including increased eligibility requirements, higher employee contributions, and limiting cost of living increases” since 2009, according to a Nov. 2016 edition of New York Law Journal. And many states have gone to court over those reforms.
There are mixed opinions on how much a state can tinker with contractual public pensions and get away with it. Pensions are usually protected under the Contracts Clause of the U.S. Constitution. If a public pension is considered a legal contract (and it usually is) the Contracts Clause comes into play and offers lots of protection to the employee and retiree.
What does this mean? It means that it’s good to have an inviolable contract like Kentucky has. But the courts will always have their say if a challenge is placed before them.
Recommended pension reforms that are on every Kentucky public employee’s and retiree’s mind are not set in stone. The Governor’s consultant on pensions, the PFM Group, released its recommendations on possible changes several weeks ago. Legislative leaders say they aren’t sure which of those recommendations will make it into law. At this point we aren’t even sure when the public pension legislation will be ready. Governor Matt Bevin said he was calling a special session on pensions in October, but lawmakers now say it will take longer to get agreement on a bill, possibly November. So if there is a special session this year, it may not be held until much later.
We need to use the time we have now to study which recommendations are best for our public pension system and the people in it. We need to make sure our plan is fair, constitutional, and successful. Piecemeal changes will not work. We need proven reform.
Knowing what changes have worked in other states, and which haven’t, can help Kentucky fix its pension problems for the long haul. And I’ll keep you informed along the journey.
Have a good week, and we’ll talk soon.