Questions Raised About Bonus Impact on Pension

The Public Pension Oversight Board (PPOB) heard testimony on Tuesday about the impact potential bonuses may have on County Employees Retirement System (CERS) benefits. PPOB co-chair Representative Jim DuPlessis (R-Elizabethtown) asked for the testimony after learning Jefferson County Public Schools (JCPS) is considering using federal funds to provide employees a $5,000 bonus.

“The way the pension systems work, we are paying a percentage based upon what an employee makes,” DuPlessis said. “We wanted, as a board, to understand the impact to the state when you use federal money to pay a $5,000 bonus to an employee, whether it be a teacher, whether it be a bus driver, or whatever.”

Kentucky Public Pension Authority (KPPA) Office of Benefits Executive Director Erin Surratt explained the tier system and how sick leave bonuses impact retirement. Surratt read the state statutes that pertain to bonuses, KRS 16.505(8)(b)(1), KRS 61.510(13)(b)(1), and KRS 78.510(13)(b)(1). She noted that lump sum bonuses “shall be averaged over the employee’s total service with the system in which it is recorded if it is equal to or greater than $1,000.”

Surratt gave the example of an employee who received a $5,000 bonus on April 12, 2022. If the employee had 10 years of service, KPPA would prorate the bonus over 10 years. As a result, the employee would see $500 added to each previous fiscal year’s salary.

Lawmakers asked Surratt whether this type of bonus would constitute pension spiking. She explained that bonus payments are not exempt from pension spiking.

If a bonus paid in one year caused an employee’s pension to spike more than 10% over the previous fiscal year, then KPPA would check for spiking. However, Surratt stated that legislators passed House Bill 87 in the 2021 session. The bill requires an employee’s pension benefit to change by at least $25 over the previous fiscal year, in addition to the 10%, to be considered spiking.

“So,” Surratt said, “a onetime bonus such as this probably would not kick in pension spiking for the member, but we do look at the last five years prior to retirement. If there is a bonus paid in every year, it could cause a member to spike and have their benefit reduced.”

Representative James Tipton (R-Taylorsville) pointed out that the initial cost of retirement contributions comes from employers. Many school district employees are CERS members. “What we’re really looking at is what is the increased cost of the benefit over the long term,” Tipton said.

Surratt replied, “The employee contributions, and the employer contribution, would be paid on whatever the bonus amount is.”

There was no estimate of how much these bonuses would affect long-term costs of the system because multiple factors are unknown, including individual employees’ total years of service and retirement dates.