Kentucky's Pension Reform Proposals - UPDATED

Last November on this blog, my office gave a brief rundown of the significant proposals being made to reform Kentucky's public retirement systems. Four months later, it's worth checking in on these efforts again, which I've done below:

Revised pension reform bill released and headed to committee in the Kentucky Legislature. After pulling back their original bill and removing, or making more palatable for some,  certain provisions related to cost-of-living adjustments (COLAs) under the Kentucky Teachers’ Retirement System (KTRS); the implementation of substitute defined contribution plans, similar to 401(k)s (albeit minus the opportunity for SSDI accruals/benefits, as pointed out in our November blog post); among other varyingly dramatic cost-reduction measures, Kentucky Senate and House leaders released their ‘Proposed Senate Substitute’ (PSS) to Senate Bill 1 this week. The full, 293-page text of the proposal has been made available on the State Legislature’s web site, here. It’s hard to know what might stay or go in this revised version; the original draft legislation was itself the product of untold numbers of revisions in the months elapsed from its announcement to its filing on February 20th. And beyond that: I’m not a politics reporter, I just have a thing for retirement systems.

Takeaways from the past two weeks’ developments in Frankfort, for family law attorneys and their clients:

  1. Future clients, who would likely be affected the most by the systemic changes originally included in the plan (more than, say, a participant and former spouse with an already lengthy service record), are likely to keep their defined benefit plans after all, as the switch to 401(k)s appears to have been scrapped due to its unexpected costs.

  2. Future clients are not entirely out of the woods, however, as the current bill’s switch to/integration of a ‘cash balance’ formula to supplement (in some cases) and succeed (in others) the Kentucky Teachers' Retirement Systems’ traditional pension formula may necessitate two separate QDROs, in the event of divorce/dissolution, for the two distinct benefit formulas.

  3. None of this may matter, as leaders from both chambers are facing substantial pressure from constituents who stand to have their benefits reduced or frozen under the proposals, and to whom appeals for consideration of the state’s enormous unfunded pension liabilities (estimated to be somewhere in the range of $40 Billion) understandably ring hollow.

  4. 293 pages is a lot of pension reading, even for me, so I skimmed in both reading and retelling. If you’ve found something within the new text that you think I missed, or would like me to discuss here, or just find interesting and need someone to talk about it with, send me an email and we’ll talk!

As soon as things begin to settle, and we can start to form a clearer picture of what changes may be at hand for Kentucky's public retirement systems and their members, I hope to write another update, this time detailing any specific changes which might affect benefits division in a divorce/dissolution. In the interim, Kentucky Retirement Systems (KRS) is providing detailed daily updates on its web page, here, alongside a number of tools which track the bill's progress and the changes made to its provisions.

  • Of additional interest: Kentucky Attorney General, Andy Beshear, released this 6-page letter to the Legislature, arguing what his office deemed were at least 21 instances of illegality within the new bill itself. 

Kentucky’s Proposed Pension Reform Plan

On October 18, 2017, Governor Matt Bevin and state Republican leaders unveiled a plan that transitions Kentucky Retirement Systems’ traditional pension plans and hybrid ‘Cash Balance’ plans into Defined Contribution Plans for all newly enrolled (and many current) employees.  If the bill passes, substantial changes will be made, impacting participant benefits, retiree healthcare, disability, and death benefits. 

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Kelly v. Kelly, NO. 2012-CA-001081-MR (Ky. App. 2014)
When There is No QDRO, Income Tax Liabilities and Reporting Obligations Must Be Negotiated, Allocated and Structured Between the Parties

Rendered: August 29, 2014
Not To Be Published
Opinion Reversing

To: Domestic Relations Attorneys on BOTH Sides of the River
Re: I’m Sorry, and You’re Welcome

Let me start by saying, if you hate QDROs, I wager that this post will help you see QDROs through a more affectionate lens….

To that end, qualified ERISA-based plans should be your preference when assigning retirement benefits to a former spouse. In fact, a red flag should go up whenever you encounter a plan that is not governed under ERISA. Importantly, non-ERISA plans are subject to their own set of rules that may limit or even prohibit the assignment of benefits to a former spouse. 

For attorneys in Ohio and Kentucky, there are certain retirement plans out there you should be on the lookout for that are “non-ERISA” and/or “non-qualified”.  THESE PLANS MAY NOT BE ABLE TO BE DIVIDED VIA QDRO OR SIMILAR COURT ORDER. For instance, if your client (or his/her spouse, or former spouse) has a retirement plan with the City of Cincinnati, listen up. City of Cincinnati pension benefits cannot be divided by QDRO. The same may be true if one of the parties is an executive with Procter & Gamble, or General Electric, to name only  a very few local employers with supplemental executive retirement plans. 

You are thinking, “What’s the big deal Eileen?” That is because you are ahead of the bell curve. You are one of the lucky who discovered pre-decree that you could not divide the pension via QDRO. You were able to instead negotiate an alternative equitable distribution of the pension; perhaps an offset with the parties’ much coveted rare, mint condition first edition Princess Diana Beanie Baby collection. You saved yourself and your client a lot of time, money, and heartache by not simply having the parties sign off on a property agreement “splitting the pension via QDRO”, only later to find out post-decree that the pension could not be divided via QDRO. I bet you were a ‘hand-raiser’ in law school too. As for the rest of us...

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Kentucky Retirement Systems - Denial of Request to Purchase Service Credit

Coleman v. Kentucky Retirement Systems, No. 2012-CA-001518-MR (Ky. App. 2014)
Court Denies Request to Purchase Service Credit under CERS

Rendered: January 10, 2014
Not to be Published
Opinion Affirming

For those interested in breaking pension news, though technically off-QDRO-topic: 

This case does not involve any domestic relations issue with regard to state retirement system benefits. Rather, the Court of Appeals visits the issue of a member’s eligibility to purchase omitted service credits in the County Employees Retirement Systems (“CERS”) under KRS 61.552(2).  

Specifically, Appellant sought to purchase service credit for a period of time that she was employed as a child support caseworker for a private practitioner in a private law practice. During such time, the private practitioner was serving under contract with the Commonwealth of Kentucky as a Special Prosecutor for child support for two local counties. The private practitioner had formerly been a County Attorney for whom Appellant had previously worked as a child support caseworker (and during such time was a member of CERS).  

Based upon the plain language of the relevant statutes, the Court found that while Appellant worked for the private law practice, Appellant was not an “employee”, and the former County Attorney turned Special Prosecutor was not an “employer” of a participating “county”.  Thus, the Court affirmed the decision of the Board of Trustees of the Kentucky Retirement Systems denying Appellant’s request to purchase service credits.

In addressing one of Appellant’s more creative arguments, the Court was not convinced that working an analogous position in the private sector to one that had been previously worked in the public sector, and eligible under CERS, was a basis for later inclusion in the system under KRS 61.552(8).

Kentucky Retirement Systems Loses Motion - Bankruptcy Case Will Proceed... for Now

For those interested in breaking pension news, though technically off-QDRO-topic: 

On November 8, 2013, Federal Bankruptcy Court Judge Joan Lloyd of the Western District of Kentucky, Louisville Division, issued dual opinions that resulted in the Seven Counties Services bankruptcy case being able to proceed (for the time-being, anyway). Seven Counties Services is a mental health agency serving counties in the Louisville-area. The agency filed for bankruptcy protection this past April in an effort to avoid pension obligations to its employees. 

Judge Lloyd determined that KRS and KERS would not enjoy sovereign immunity from suit.  In her opinion, she found that KRS and KERS voluntarily invoked the jurisdiction of her court by actively participating in the bankruptcy proceedings and companion adversary actions.  Judge Lloyd further ruled that certain issues were not ripe and instead needed to be more fully developed at trial.  The critical issues concern whether KERS is defined by ERISA as a governmental plan, and therefore, whether Seven Counties is an eligible participant or whether it cannot be compelled to participate.