Dear Faculty & Staff:
For several years now, the Kentucky Employees Retirement System’s (KERS) pension crisis has been the cause of much anxiety around campus, and frankly, across the Commonwealth. And while responding to the global pandemic has been at the forefront of our work for the past several months, we have been mindful that a resolution to the pension challenge is absolutely critical not only for our long-term financial stability, but for the well-being of our staff as well. We have not lost focus of this extremely important issue facing our university. With that in mind, I am sharing a recap and an update on the process with you today.
KERS contribution rates have been steadily increasing every year from 24% in Fiscal Year 2013, to 39% in Fiscal Year 2015, to 49% since Fiscal Year 2017. Even prior to my joining NKU, there was talk about how, because of how severely underfunded the KERS pension plan was and continues to be, our rates would balloon from 49% to 83% in a single year and result in a $14 million base budget increase.
In Fiscal Year 2019– my first year as your president– we were given a reprieve with rates being frozen at 49%. The six regional comprehensive university presidents have worked together over the last two years to advocate for a long-term solution to the pension crisis. We offered reasonable solutions that would balance the budgetary impact for the Commonwealth, while giving us a financially sustainable path forward including an opportunity to pay our fair share of the state’s pension liability. Among all the Kentucky public institutions, NKU was the most vulnerable and most at-risk if no solution was found because of having the largest percentage of staff in KERS.
During the last legislative session, we worked with legislators to advocate for employee choice and educated them about the impact on our employees. While we felt we were making progress, we were left with House Bill 1 as the only recourse with another short-term freeze of our rate at 49%. House Bill 1 presented the following options for KERS:
1. Exit the system, pay off the employee liability in a lump sum, and move all Tier 1, 2, and 3 employees to a defined contribution plan (Hard Freeze Lump Sum); or
2. The same as above but pay off the employee liability in installments (Hard Freeze Installment Payment);
3. Exit the system, but allow all Tier 1 and Tier 2 employees to remain in the system and pay off employee liability in a lump sum and move Tier 3 employees to the defined contribution plan (Soft Freeze Lump Sum); or
4. The same as above but pay off employee liability in installments (Soft Freeze Installment Payment);
5. Stay in the system with no changes and be subject to future contribution rate increases (Status Quo).
Over the past few months, key members of the President’s Cabinet have been working with consultants to help gather information to explore the financial impacts of each option. We have been diligently reviewing the pros and cons of each option, so we can provide a data-informed recommendation to the Board of Regents before the end of the year.
After a careful review of these options, we have determined that the status quo option and both the installment payment options are financially not feasible for us. (Options 2, 4 and 5). The status quo option takes us to an 83% contribution rate next year and quite likely to an even higher contribution rate in the future. The installment payment options have significantly higher debt service and annual payments than the lump sum options making those options financially unsustainable as well. Based on the impact summary, we will focus on the remaining 2 options:
During this afternoon’s Pension Webinar, I explained the analysis by our consultants showed that most Tier 1 and Tier 2 employees would see a loss in retirement benefits if we opted for the Hard Freeze Lump Sum option. Therefore, we asked our consultants to model scenarios in which we could adjust the contribution rates into our defined contribution plan for Tier 1 and Tier 2 employees, in order to minimize any variance between the retirement benefits earned by employees through the defined contribution plan, and what they would have earned by remaining in KERS. This was important for us to do because, while we need to protect the long-term financial stability of the university, we also need to ensure the financial wellbeing of our employees’ retirement. As we continue to explore the implications of both options, we are aware that there are pros and cons to each option.
But what is most encouraging in the analysis so far is that we have two feasible options to consider. Both options provide a financially viable path forward for the university. The Hard Freeze Lump Sum option will require an age-adjusted defined contribution plan, so employees’ retirement benefits are maximized and any impact from leaving KERS are minimized. The Soft Freeze Lump Sum option will result in a higher debt service, the consequence of which must be considered as well.
As we continue to work on analyzing the specifics of each option, we will engage with staff and the campus to carefully explore the implications of each option. More information will be coming out about these sessions soon. Our Pension Central website also has been updated with the new timeline, and we will continue to post FAQs from discussions with employees, Staff Congress Pension committee and the campus writ large.
With the January 1 deadline approaching, we have a tight timeframe to present the recommendation for the Board decision. Here are the key dates:
Please know I am acutely aware that this may be the single most important financial decision we make as a university. I am also fully cognizant that this decision will have an individual and personal impact on each of you. Which is why a timely resolution of this arduous process is essential to the financial health of the university as well as to the financial and emotional well-being of our employees. I promised we would have on-going communication with you when we began this pension journey two years ago, and we will adhere to that process going forward through open dialogue, discussions and information sessions.
Again, it is important to remember that we have two feasible options to consider, and both provide a financially viable path forward for the university. I know many of you will have questions, comments and concerns. I ask that you participate in the process through the upcoming weeks as you are able. And finally, please share your questions and concerns with us by emailing firstname.lastname@example.org.
Thank you for all you are doing in support of our university and our students.