Pension bill could force some Kentucky counties to raise taxes in order to receive state assistance
By Melissa Patrick
Kentucky Health News
Under a new pension funding proposal pending before the Kentucky General Assembly, some counties could be asked to increase their public-health taxes to help pay for their health departments’ pension liability.
“Because we’ve been giving a free ride to some of these guys, they haven’t had to go to their communities and ask for a tax increase,” said Rep. Jim DuPlessis, R-Elizabethtown. “That needs to stop.”
DuPlessis spoke Feb. 6 after the House State Government Committee unanimously approved his bipartisan bill to completely change the way health departments, regional universities and quasi-governmental agencies pay for their pensions.
The legislature has frozen health departments’ pension contributions at 49.47 percent for the past two years, but on July 1, the day the next two-year budget starts, this is set to jump to 93%, a level many say would force them to close. Gov. Andy Beshear has proposed funding to make the effective rate 67%.
DuPlessis’s House Bill 171 would move these entities away from the current “percentage of pay” formula and move them to a model that requires them to pay only what they owe the pension system, divided evenly over the next 27 years. This is often called “level dollar funding.” “You pay what you owe, no more, no less,” DuPlessis explained.
The plan is also designed to keep employees in the system; many health departments have shifted to contract labor to reduce their pension payments. It would require all new employees to have a pension obligation of 10.35%, which is dubbed the “normal cost.” So, in essence, the departments would get two pension bills to cover their pension costs, one for the unfunded liability for current and past employees and the other for new employees.
Rep. Joe Graviss, D-Versailles, one of the legislation’s three sponsors, said it will have winners and losers.
Randy Gooch, director of the Jessamine County Public Health Department, said under the proposed 27-year amortization schedule, about 45 of the 60 health departments in the Kentucky Retirement System would owe less money and about 15 would owe more — and about six of them would need state assistance to help pay their pension obligation.
Gooch cautioned that his analysis involves “a lot of moving targets” and that it’s important to keep an eye for the actuarial report on the bill, which wasn’t available last week.
DuPlessis said legislators want to help health departments that aren’t able to meet their pension obligations, but in order for them to get that help, their counties must have a public health tax of at least 8 cents per $100 assessed property value.
The state has established a minimum public-health tax of 1.8 cents per $100 worth of property, with a cap of 10 cents per $100. Several public-health directors have said they have been told that only one county in a district health department would need to levy the 8-cent tax to qualify the district for state help.
“We’re not going to let the health departments go out of business,” DuPlessis said after the meeting. “They’re an integral part of the state. They are a statutory requirement of the state, and we’re not going to let that happen.”
At the same time, he said, “It’s not fair for the state to keep sending money to people who aren’t taxing those who they are serving. This bill says you pay what you owe. And for health departments that can still tax, they need to take care of it because they’re supporting their local communities.”
The committee removed language that would create an assistance fund to help struggling health departments and certain other groups pay their employer contribution rates. Rep. James Tipton, R-Taylorsville, assured colleagues that he would work to make sure that assistance was added in the Appropriations and Revenue Committee, where it is expected to go and where he is a member.
He said it will be the working group’s recommendation for the A&R Committee to maintain the $50 million that is in the current budget to assist these entities, and to add another $50 million, as Beshear has proposed.
Jason Bailey, founder and executive director of the Kentucky Center for Economic Policy, said in an e-mail that a funding component is essential for the bill to work, since the costs are significant to protect the “losers” from unaffordable contribution levels.
“It’s important to note that funding will not just need to be there for this biennium but for the next few decades,” he said. “By itself, it helps some, but deepens the problem for others.”
The Kentucky River District Health Department would be a loser. Its public health director also stressed the importance of financial help from the state.
“As long as the funding is included in 171, we are very much in favor of it because it recognizes we can’t raise it locally,” Director Scott Lockard said. “If there is not a funding component . . . [House Bill] 171 closes our doors.”
HB 171 would increase Kentucky River’s pension liability to about $4.6 million, up from $2.6 million in the current funding arrangement.
“So if I was to try to pay my liability without a new funding source, it would literally close my doors in less than six months, with this increased pension liability,” Lockard said.
Still, two of the seven counties in the district, Lee and Letcher, already have an 8-cent public-health tax, so it would qualify for state help under the suggested plan for fund distribution.
Dr. Kraig Humbaugh, director of the Lexington-Fayette County Public Health Department, said that while level-dollar funding will raise costs for his department, its fixed monthly payment is appealing. “We never know what our contribution is year to year, making it very difficult to plan or strategize,” he said.
HB 129, the Public Health Transformation bill, which changes the way public health departments are funded, as well as how they prioritize their resources, would make local governments levy a public-health tax rate of at least 1.8 cents per $100, or equivalent alternative funding, which would be allocated toward basic programs.
Public health directors say passage of both bills is imperative.
“It is crucial for health departments that 129 and 171 are both passed,” Lockard said. “They go hand in glove. So if 171 is passed without 129, then that is going to cause more financial hardship, and vice-versa. If 129 is passed, but 171 is not passed, then you’re going to see health departments that are just not going to be able to meet that 93 percent” percentage-of-payroll pension funding.
Lockard added, “This will allow us to keep employees in the retirement system and not to contract out our future staffing needs because going forward our normal cost will be 10.35% for any employee. So I would start hiring all those employees back again and putting them in the retirement system that I’m now contracting out to a staffing company.”
He said the bills “will allow my agency a path forward financially where we can take care of pension obligations and get the funding we need to focus on providing the core public health services to the people of Kentucky River District.”