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Retirement/Pension

Retirement offerings typically fall into one of two types of plans: defined benefit and defined contribution.  A defined-benefit plan guarantees certain benefits based on a formula, usually incorporating an employee’s years of service and average annual pay.  Defined-benefit plans are usually referred to as pensions, and sometimes include retiree health benefits.

A defined-contribution plan provides benefits based on the amount of money an employee contributed to the account and how his or her investments performed over time.  Typical examples of defined-contribution plans include 401(k), 457 or IRA accounts.

After individual city pensions were closed in 1988 (except Lexington’s police and fire fund), if city officials wanted to offer a defined-benefit pension system, then their employees were required to join the County Employees Retirement System (CERS).  Employees are covered under either hazardous duty – most police, fire or EMS employees – or nonhazardous duty.  According to state statute, hazardous duty employees pay eight percent of their salaries to CERS while nonhazardous duty employees pay five percent.  All employees hired after August 31, 2008, pay an additional one percent to fund health insurance benefits upon retirement.  Employees hired on or after January 1, 2014, participate in a cash-balance plan.  These plans are still considered a defined-benefit plan, though they operate more like defined-contribution plans.

The employer contribution rate is determined each year by the Kentucky Retirement Systems (KRS) Board of Trustees.  Those rates are currently projected to increase sharply over the next decade.  Once a city joins CERS, it cannot take its retirees out of the system. In 2018, the General Assembly passed a KLC initiative to limit drastic increases in CERS employer contribution rates due to assumption changes approved by the KRS Board. Those rates will not increase by more than 12 percent annually for the next few years.

Separating CERS from the Kentucky Retirement Systems and improving the financial stability of the public retirement system are top priorities for cities, and the KLC Legislative Team will monitor any legislative activity pertaining to these issues.

Employee
Type

Employee
Contribution

Actual Employer
Contribution (FY18)

Actual Employer
Contribution (FY19)

Actual Employer
Contribution (FY20)

 Nonhazardous

5% or 6%

19.18%

21.48%

24.06%

 Hazardous

8% or 9%

31.55%

35.34%

39.58%

 

Note: These rates have more than tripled for CERS nonhazardous and more than doubled for CERS hazardous since 2004. The employer contributions are in addition to salary costs and only pay for future retirement health care costs and pensions; it does not cover any current benefits, such as health or dental insurance. 

 

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