A Citizen's Guide to Kentucky's Pension Crisis | Page 5

PENSION TERMS
DEFINED
INVIOLABLE CONTRACT
State laws that provide Kentucky’s pension benefits are a contractual right and
stipulate that those benefits may not be
reduced or terminated by the legislature
retrospectively.

ACTUARIALLY REQUIRED
CONTRIBUTION

Why not reduce benefits?

Also known as the ARC, this is the amount
of money actuaries calculate that an employer needs to pay into a retirement plan
each year to fully fund benefits. The ARC

State law protects retirement benefits for state employees hired before January

reflects the cost of benefits that will be paid

1, 2014, under the INVIOLABLE CONTRACT, with the law stating that

to employees and additional funding that

pension benefits “shall not be subject to reduction or impairment by alter-

will enable the government to reduce the

ation, amendment, or repeal.” Teachers’ retirement benefits are afforded sim-

unfunded liabilities of the past.

ilar protection, although certain benefits provided to retired teachers (such as

BIENNIAL BUDGET

health insurance and use of sick leave in calculating benefits) are not covered.

The biennial budget, adopted every two

It should be noted that the restrictions imposed by the inviolable contract are

years by the General Assembly, is Kentucky’s financial plan for spending money

not fully clear. The General Assembly has not enacted legislation to reduce

on programs and services. The budget

retirement benefits for current employees or retirees so there has been no

appropriates money by fund type. These

legal challenge under the statute.

include the General Fund, the bulk of the
state’s revenue generated by income, sales
and other taxes; the Road Fund, financed

Kentucky’s retirement systems are funded by employers and employees, both

by the gas tax and the sales tax on auto-

of whom contribute a percentage of the employee’s wages to the retirement

mobiles; restricted funds, money that state

system each pay period. The retirement systems invest these contributions

agencies generate through license fees,
tuition and other charges; and federal funds.

(in the stock market and elsewhere) and use the investment income to fund
retirement benefits. The amount paid by employees is set by state law. Experts
for the pension plan annually determine the ARC, or ACTUARIALLY
REQUIRED CONTRIBUTION, that should be paid by state and local

governments to ensure contributions are adequate to fund the system. The
actual amount that is paid to the Kentucky Employees Retirement System and
the Kentucky Teacher’s Retirement System is determined by the General Assembly as part of the state’s BIENNIAL BUDGET. Local governments pay
the full required contribution to the County Employee Retirement System as
they have no ability to pay a lower amount.

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