Even Pending Appeal, Winners and Losers in KRS & KTRS Reforms

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If you’re a family law attorney in the Cincinnati metro area, there’s a good chance you’ve dealt with a client or spouse of a client who has accrued benefits under either the Kentucky Retirement Systems (KRS), or the Kentucky Teachers’ Retirement System (KTRS), and you’re no doubt aware of the current uncertainties (merited and otherwise) surrounding their future form and amount(s).

That same uncertainty has spurred some public employees who participate in these plans to retire earlier than they might otherwise have planned, rankling others who feel they’re “gaming the system,” or “double dipping.”  Two Former (and likely to be newly re-elected, this fall) County Prosecutors have found themselves under unexpected scrutiny, and the scapegoats of some Kentucky Legislators (for whom there might be some convenience in highlighting the $60-odd thousand yearly pension of a few individual members, in lieu of the greater systems’ $64 billion in unfunded liabilities, and the stalled reform thereof), for commencing their own pension benefits and running for likely re-election to the same office they vacated to commence them from. In the event either former County Attorney Bobbi Jo Lewis or former Commonwealth’s Attorney Laura Witt return to the offices they retired from, they would draw a salary while receiving pension benefits for their previous service and participation under the Plan(s).

From their perspectives, these attorneys are just making a choice they’re entitled to make, regarding benefits their years of service have entitled them to take. And both cited the uncertainty of ongoing (currently stalled, pending a State Supreme Court ruling on the Governor’s Appeal of the state Attorney General’s successful suit to block the already watered down, but still controversial, Senate Bill 151) reform efforts, as or among their primary reasons for doing so. And, since both are running unopposed, the prospect of their receiving both salaries and pension benefits, come January, seems assured.

In your own practice, you may have encountered clients whose individual benefits, either as Plan Participant or Alternate Payee, seem uncertain at present (whether for real or perceived reasons), which can spell trouble for and complicate property settlement negotiations. And, as Attorneys Lewis and Witt’s examples make clear, individual circumstances and considerations are unique to every plan beneficiary.

The takeaway:
While the current, pending legislation reserves most of its effects for future employees, or those whose benefits in the systems are new or otherwise limited, any negotiations concerning or offsetting individual benefits under the (potentially) affected retirement systems should be done with full cognizance of all prospective changes thereto. Or, if neither the parties nor counsel(ors) wish to navigate the full text of Senate Bill 151 to deduce the exact effect and extent thereof such reform may have on a party or parties’ prospective benefits, you may find that the safest, most assuredly equitable solution is to avoid any offsetting of (potentially) affected benefits entirely, and to instead divide the benefits or portion(s) therein between the parties via… you guessed it: QDRO.

(If you do, be sure to utilize the form specified under KRS Chapter 13A, or other controlling regulation, or shoot an email to your friendly, QDRO blogging expert for a contract to get started.)

Be sure to check back for updates leading up to Governor Bevin’s September 20th Kentucky Supreme Court challenge, or read more about previous iterations and developments of Kentucky's pension reform on our blog, here.

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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VALUING KTRS PENSIONS IN DIVORCE: WHERE DO WE GO FROM HERE?

How Does the Family Law Practitioner Properly Advise a Client in Divorce When One Party Participates in KTRS?

This blog post is based upon a topic I have researched over the past year, and am continuing to explore with the intention of ultimately submitting something more formal for publication.  This post follows my general blogging trend.  I present a problem – for instance, in this case arising from legislative and judicial ambiguity – and then submit to my reader a possible solution to chew on.  It is a longer post than usual, and is not for the faint at heart.  Venture at your own risk...

Recently, in Eden v. Eden, No. 2012-CA-000819-MR (Ky. App. 2014), the Kentucky Court of Appeals considered the proper classification and division of a Kentucky Teachers’ Retirement System Pension (“KTRS Plan” or “KTRS Pension”) in divorce pursuant to the governing statutes and regulations (see my blog post dated March 25, 2014).   Although not directly at issue in Eden, because the participant was already retired and drawing his monthly retirement allowance, this author could not help but to be reminded of the uncertainty under state law when valuing, classifying, and dividing a KTRS pension in divorce.

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KNOW THY EXPERT, BUT ALSO KNOW THY PLAN AND THY LAW

Eden v. Eden, No. 2012-CA-000819-MR (Ky. App. 2014)
Court Finds Pension Evaluator Did Not Follow the Law

Rendered: March 14, 2014
Not to be Published
Opinion Vacating and Remanding

The Kentucky Court of Appeals’ most recent QDRO-related case may be an occasion for pause for even the most careful and seasoned family law practitioner.  The facts are relatively simple.  Husband had a Kentucky Teachers' Retirement Systems (KTRS) pension in pay-status, and Wife had a Kentucky Lottery Corporation retirement account.  The family court adopted the expert opinion of Wife’s Certified Public Accountant (CPA) as to the valuation and proper division of the marital portion of both pensions.  Husband submitted no expert testimony in rebuttal.  See, that wasn’t so bad.  Now what could be the problem?

Bring on the math.  The CPA testified that the present value of Husband’s pension was $1,332,771.00, and of that amount $1,112,864.00 was marital.  The CPA found Wife’s retirement benefits, which were all marital, totaled approximately $385,603.00, and thus that the parties combined marital retirement benefits equaled $1,498,467.00.  The CPA then concluded that Wife should retain her retirement benefits in totem, and that an additional $363,631.00 would be required to equalize the parties’ retirement assets.  Relying on the CPA’s testimony, the family court determined that to effectuate the division of Husband’s account, Wife should receive 27.284% ($363,631.00 / $1,332,771.00 = 27.284%) of Husband’s KTRS pension via QDRO. 

Husband appealed, contending that the family court erred in its valuation and division of his KTRS pension.  Specifically, Husband asserted that the family court erroneously relied upon Wife’s expert because his opinion did not comport with 102 KAR 1:320 Section 7, which sets forth a very specific multi-step method of calculation for the valuation and division of KTRS benefits upon divorce.   Namely, 102 KAR 1:320 Section 7 requires that: (1) the participant’s “total service retirement allowance” must be obtained as of the date of divorce; then (2) the total service retirement allowance is reduced by the amount of benefits held by the non-KTRS spouse; and finally (3) the remaining amount of allowance is divided by a marital coverture fraction through the date of divorce.

The Court of Appeals agreed that the CPA didn’t follow the mandates of 102 KAR 1:320, and vacated the family court’s opinion, remanding to the family court for reconsideration of the valuation and division of Husband’s KTRS pension in accordance with 102 KAR 1:320. 

Insert author curiosity and a quick Google search of Husband's work history.  If Husband were to have had 33 years of creditable service with KTRS during the marriage, the difference in the amount awarded to Wife under the CPA’s methodology and 102 KAR 1:320 is substantial: $363,630 to Wife via CPA, versus $274,678 to Wife via 102 KAR 1:320.  That’s about $90,000 less for Wife.

And as Judge Clayton opines, a remand so significant in terms of dollars will likely cause a “ripple” effect on the equitable division of the remaining property pursuant to KRS 403.190.  Taking heed, this author also notes that the family court’s opinion was rendered in February of 2012, more than two years from the date of the Court of Appeals remand – plenty of time for assets to legitimately dissipate.   However, what we know is still left is the sting of superfluous expert fees and unnecessary post-litigation costs.  That is frustrating to this author, especially in this case, where counsel for Wife was apparently diligent in her representation.  But as always, instead of giving up, let’s peel back the onion (and fight the tears) together and figure out how to prevent a repeat of Eden.   

In some ways, experts tend to exist in a vacuum.  Each knows a great deal about one flower in the garden, but more than one expert might be necessary in order to see the entire garden.  Your expert team should know three areas: the actuarial mathematics to calculate present values; the federal and state law governing the plan being examined, as well as the plan's specific terms and internal QDRO procedures and rules; and your state's domestic relations law as it relates to those present values and the division of marital property rights (e.g., there are significant variations in such law amongst Kentucky, Ohio, and Indiana).  Few experts alone have a comprehensive knowledge of more than one of those areas.  And a deficiency in any one of those areas can end up blind-siding even the best expert witness.  As seen in the garden of Eden (sorry, couldn’t help it), after one has adopted the appropriate methodology for formulating present values, knowledge of the specific plan terms and the law become of paramount importance.

If the thought of putting together a “team” of knowledgeables scares you, or your client’s pocketbook, just reflect upon the famous idiom – penny wise and pound foolish.  Take care of the pennies and the pounds will take care of themselves.  I hate to even guess at this, because it makes my head hurt for the parties involved and the advice comes at their cost, but my take is that Wife would have spent less adding another member to her trial team to work in conjunction with the CPA, rather than what she ended up spending on unrewarding post-decree litigation.

* See my previous blog post from July 19, 2013 regarding recent legislative updates to KTRS, specifically to 102 KAR 1:320, which directly affects QDRO submissions.

Methods of Pension Division in Divorce

Fitzgerald v. Fitzgerald, No. 2012-CA-000532-MR (Ky. App. 2013)
Deferred Distribution Trumps Immediate Offset Yet Again

Rendered: November 15, 2013
Not to be Published
Opinion Affirming

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The Opinions keep coming in from the Kentucky Court of Appeals.  This past Friday, the Court had the chance to yet again review another trial court’s decision with regard to the division of multiple retirement plans in divorce.

There were four combined plans at issue, two pensions and two deferred compensation plans.  Of significance in this case, Wife’s pension was with the Kentucky Teacher’s Retirement System (KTRS).  To Husband’s protest, without discussion of the value of either pension plan, the trial court divided each plan via the deferred distribution method and by utilizing QDROs (incorporating a coverture formula to determine the appropriate marital portions).  Husband sought the plans to be divided instead by the immediate offset method (also referred to as the “net present value method”; for instruction on the differing methods of pension division under Kentucky law see Armstrong v. Armstrong, 34 S.W.3d 83 (Ky. Ct. App. 2000)).  The Court of Appeals, in affirming the trial court’s decision to divide the pensions via deferred distribution, considered both the speculative nature of a pension plan in terms of actualization of benefits for the participant and the difficulties involved with attempting to equalize state and private pension plans.

To the practitioner with a ‘perked ear’:  The Court took heed of the trial court’s finding that the KTRS plan included post-retirement cost-of-living (COLA) increases and did not include participant payments into Social Security.  While to the contrary, Husband’s private pension did not include COLAs and did pay into Social Security.  Could this mean Kentucky courts are ready to look at issues our sister states have previously reconciled (i.e., the difficulties in comparing the valuations of government and private pensions that have often incompatible terms, like whether the participants pay into Social Security, are entitled to COLAs, etc.)?

As a side note of interest, at trial, the parties called a joint witness to address the issues of the four retirement plans.  The trial court ordered that the witness prepare the resulting QDROs ordered by the Court (for both the pensions and the deferred compensation plans) and that the parties “equally share the cost of [the witness’s] service.”  In such complex matters, perhaps the joint hiring of a skilled intermediary is a worthy consideration in order to avoid a Pyrrhic victory in the courtroom.  That is, when the parties truly seek a neutral third party to preserve the equities, and share the mutual desire to keep the costs of litigation from eating away at the ‘reason for fighting’.

Kentucky Teachers’ Retirement System (KTRS) Revises 102 KAR 1:320 Relating to QDROs

KTRS did not recognize QDROs until House Bill 289 was signed into law on April 13, 2010.  This legislation resulted in the promulgation of 102 KAR 1:320, setting forth the procedures for filing a QDRO with KTRS. 

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102 KAR 1:320 remained unchanged until the regulation was updated on May 31, 2013.  These recent revisions clarify the process for QDRO submission and present changes to the mandatory QDRO form and several other related forms required by KTRS.  The revisions further provide new instructions for the handling of certain administrative matters upon entry of the divorce decree.  For instance, members are now required to forward a copy of the final decree to KTRS, and depending on the status of the member (retired or active), the member must then request and complete various forms regarding any change in election of retirement options and designation of beneficiaries.

Remember, KTRS will reject a QDRO if the parties have not followed the procedures in 102 KAR 1:320 precisely, including submission of the appropriate QDRO forms.  Practitioners must take careful note of the recent changes in the law in order to properly effectuate the division of a member’s retirement allowance in divorce.