The Richmond Register

Local News

February 12, 2013

Stumbo: Cigarette tax hike could shore up pensions

Lawmakers stirred up over pension reform

FRANKFORT — Maybe it’s only a small fissure, but at least a small crack in all the cooperative spirit in Frankfort showed up Tuesday.

Democratic House Speaker Greg Stumbo, D-Prestonsburg, said he will discuss with House Democrats Wednesday multiple options, including an increase in cigarette taxes, to pay for recommendations to reform the employee pension system.

Republican Senate leaders immediately criticized the idea.

The Republican-controlled Senate has already passed a bill sponsored by Majority Leader Damon Thayer, R-Georgetown, which is based on recommendations of a bi-partisan task force on pension reform co-chaired by Thayer.

Thayer’s bill, Senate Bill 2, would end cost-of-living increases for pensioners, move new hires into a hybrid, cash-balance plan; and it states the legislature’s “intent” to fully fund annually required contributions to the funds.

But it does not address from where the money will come to pay for the key recommendation to fully fund the system.

That annually required contribution or ARC is estimated to be $327 million next year.

Stumbo has repeatedly said he wants “a dedicated funding source” to pay the ARC and said on Monday that failure to fund the ARC in the pension reform bill is simply continuing to delay real reform.

On Tuesday, Stumbo said he will offer multiple options to House Democrats when they meet Wednesday. He identified only one of the possible options, however: an increase in the cigarette tax, something already recommended by the governor’s Blue Ribbon Commission on Tax Reform as part of a larger re-writing of the tax code.

But that suggestion — and an article in The Courier-Journal which quoted analysts saying moving to the cash-balance plan would actually cost the system more money in the short-term — set off a couple of floor speeches by Thayer and Senate President Robert Stivers, R-Manchester, Tuesday afternoon.

The cash-balance plan applies only to new employees — it does not affect current employees or retirees who have a defined benefit plan. Under that plan, the state and the employee pay a portion of the employee’s salary and benefits are guaranteed.

Under the cash-balance plan, the state and employee continue to pay a portion of the employee’s salary, but the money is deposited into an individual account. When the employee reaches retirement age, he can take the money in a cash payout or purchase an annuity with the cash.

Opponents say placing the money in the individual accounts will cost investment returns from the system at large.

But Thayer said Tuesday that isn’t the case.

“Our actuarial analysis shows the costs under Senate Bill 2 are somewhat lower than the current plan,” Thayer said, displaying comparison charts to back his claim.

Thayer said the bill will result in less than one-tenth of one percent increase in costs to employers – really the state as each state agency makes contributions for its employees – while over time the current system would increase costs by a much larger percentage.

Thayer’s analysis indicates employers would have to pay 64.5 percent of an employee’s salary by 2013 while SB 2 would require on 40.4 percent in the same year.

“It will save the state billions,” Thayer said. He described the task force recommendations as a “carefully considered bi-partisan solution.”

Stivers, who has gone out of his way to improve the tone between the two parties since he became president in January, said the press must also play a role in improving relations, instead of “playing gotcha politics.”

Both Thayer and Stivers subsequently criticized the idea of using a cigarette tax to pay for the ARC because smoking rates are declining and so will revenue from tobacco taxes.

“You have a shrinking base which automatically means in a few years you’re going to have to have some other type of tax revision or increase in tax,” Stivers said. “So I think it’s flawed in the premise of being a way of a dedicated source.”

“It’s just not advisable to raise taxes on a declining source of revenue to pay for an increasing liability,” said Thayer, who added he believed raising taxes to pay off the pension systems’ unfunded liabilities is unnecessary.

When challenged to explain how the budget – which has been cut $1.6 billion in the last five years – can produce the $327 million for pension reform without new revenue, Stivers said already projected revenue growth of 3.8 percent is sufficient to cover the ARC.

But Gov. Steve Beshear has said he doesn’t want to fund pension reform at the cost of education which has been cut at some levels or held steady at others for those five years while enrollments have grown.

An analysis of the budget by Beshear’s Executive Cabinet Secretary and former budget director Mary Lassiter last week before the legislature’s budget committees indicates the growth money Stivers and Thayer pointed to is already accounted for in increased Medicaid costs and covering one-time funds in the current budget which won’t be available next year.

Ronnie Ellis writes for CNHI News Service and is based in Frankfort. Reach him at rellis@cnhi.com. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort.

 

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