FRANKFORT — FRANKFORT – What began all dressed up as a bi-partisan approach to “the number-one issue facing the state” appears to be unraveling, perhaps pointing toward a special session on pension and tax reform.

Tuesday the Democratic-

controlled House “gutted” a bill passed by the Republican Senate based on a bi-partisan task force’s recommendations to reform the state’s badly underfunded employee pension fund and.

Senate Bill 2, sponsored by Sen. Damon Thayer, R-Georgetown, would move new employees into a hybrid, cash-balance plan and end cost-of-living adjustments while preserving current benefits for existing employees and retirees.

But the key provision of the bill is to fully fund the annually required contribution (ARC), and the Senate bill provides no way to pay for what is expected to be about $327 million in extra costs next year – with between $100 million to $120 million coming from the general fund. (Most of the remainder is paid through federal programs, local governments and other agencies whose employees are in the pension system and from the road fund for highway employees.)

The plan is also criticized by employee groups for changing the benefit structure for future employees, and some critics say it will cost more in the short term than the current system.

Tuesday, the House State Government Committee essentially re-wrote the bill.

A last-minute committee substitute by committee Chairman Brent Yonts, D-Greenville, would preserve defined benefits for all employees, current and future; preserve COLAs so long as they are pre-funded; try to bind future legislatures into having to make the ARC payment; and allow the legislature to amend benefits going forward for employees hired after July 1, 2013.

Any future changes would not affect benefits already accrued, Yonts said.

The reaction from Thayer and Senate President Robert Stivers, R-Manchester, was as swift as it was predictable.

“They have gutted the bill,” said Thayer.

“In four to five years, they’re desirous of going on a pay-as-you-go basis,” Stivers said. “In four years, (the system) will be insolvent,” Thayer chimed in.

And that was before the House budget committee heard a proposal from House Speaker Greg Stumbo, D-Prestonsburg, to increase lottery games and utilize a greater take from instant racing games to fund the ARC.

Just as happened in the state government committee earlier Tuesday, budget committee members got the committee substitute only when the committee convened. And just as occurred earlier in the day, the funding mechanism passed on a straight party-line vote, with Democrats voting yes and Republicans passing.

They said they passed because they’d not had time to read or analyze the two proposals.

Between the two committee meetings, House Minority Leader Jeff Hoover, R-Jamestown, complained on the House floor that it was unfair to lawmakers and to the public to have to vote on Yonts’ 53-page bill lawmakers hadn’t been given time to read.

He implored House Democratic leadership to provide bills in advance.

When Stumbo presented his funding plan an hour or so later, he jokingly apologized for the late committee substitute, but that didn’t appease the Republicans on the committee.

Stumbo’s plan would direct the Lottery Corporation to expand its offerings, perhaps including internet lotteries and KENO – a rapid-fire game on machines – and combine those extra revenues with a greater state take from instant racing games.

Lottery proceeds above current levels plus a two-percent a year growth would go to a “Pension Sustainability Trust Fund.” Lottery revenues currently finance KEES and needs-based college scholarship funds, growing at about 2 percent a year, Stumbo said.

That amount will be preserved for the scholarship funds, but anything above that would go to pensions.

Instant racing currently is offered at two of the state’s thoroughbred race tracks. It has been approved by the Racing Commission and upheld by Franklin Circuit Court but has been appealed by gambling opponents to the Kentucky Supreme Court which has not yet ruled on the question.

Stumbo said he believes the law will be upheld, and if instant racing is expanded to the other tracks, the two sources of revenue – lottery and instant racing – will produce about $105.5 in state revenues by the end of 2016 and as much as $183.7 by 2022. He said his estimates are more conservative than estimates by the racing industry.

The plan prompted numerous questions – and not just from Republicans. Bluegrass area lawmakers questioned its impact on the racing industry while others asked about its impact on KEES. Republicans questioned the reliability of the figures.

But Stumbo said every dollar gained by the state meant at least one dollar less from the general fund which must go to pensions.

He also said his proposal is only a first step.

But Stivers and Thayer didn’t seem interested in negotiating a compromise. So the question may become, will anything be any different in a special session.

Some lawmakers contend Gov. Steve Beshear wants to special session and to tie pension reform to tax reform which will produce more revenue. Stivers and Thayer have consistently said they state should not raise taxes.

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.