About the Issue

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Never Missed PaymentBreaks the Promise401(k) SwitchSecurity for TeachersAttracting New TeachersNo Bailout for Frankfort’s DebtsNew Changes & Further JeopardyMass RetirementThis is a Moral Issue

 

While teachers have never missed a payment to the Teacher’s Retirement System, state government failed to contribute its requested share from 2007 to 2016

In 2007, the Teacher’s Retirement System (TRS) was almost fully funded. Poor actuarial assumptions — combined with the failure of Kentucky state government to fund the requested contribution each year — has resulted in the deterioration TRS’ financial stability. Today, because of this oversight, TRS now is only 56 percent funded with an unfunded liability of roughly $15 to $20 billion dollars.
 
The statute (KRS 161.550) is a two-pronged funding approach. The first uses a percentage of pay. The last paragraph of the statute requires that, if the percentage contribution doesn’t cover what is needed (the actuarially required contribution), that the state, in the next budget, is to fund the difference in addition to the salary-based contribution. The second part is what the state has failed to fund for about a decade.
 

 

The Bevin Administration’s pension reform plan “breaks the promise” to Kentucky’s retired teachers and further destabilizes the pension fund moving forward.

The Bevin Administration puts a freeze on cost-of-living adjustments (COLA) for both current and retired teachers.

  • Bevin’s plan violates a legal contract with teachers by calling for a five-year COLA freeze for current and future retirees. This is in violation of the state’s inviable contract and breaks Kentucky’s promise with more than 52,000 retired teachers.
  • In real terms:

    • A 60-year old making $3,000 a month would, with a 5-year suspension, lose $71,000 over her lifetime. Younger teachers would lose more.
    • This will reduce benefits by more than 7.5% or greater.
Click here to calculate your own losses as a result of COLA suspensions with our COLA calculator

 

 

Switching to a 401(k) style Defined-Contribution (DC) plan is devastating for Kentucky’s current and future retired teachers and education. It will be unnecessarily MORE expensive for both taxpayers and teachers to pay off the unfunded liability and will destabilize our pension fund.

Consultants paid by the Governor, upon reviewing potential retirement options, even noted that a 401(k) style DC plan would be more expensive for the taxpayers of Kentucky and have significant transition costs.

Changing plan types introduces a significant amount of transition costs to the taxpayer. Teachers will likely pay higher administrative and investment fees within the 401k Contribution Plan to Wall Street investment companies.

Under Bevin’s plan, new teachers would no longer be paying into the Teachers’ Retirement System. The unfunded liabilities would have to still have to be funded by Frankfort.

States such as West Virginia, Michigan, and Alaska that made the switch to 401(k) style plans saw their unfunded pension liabilities dramatically increase. West Virginia, switched back to the plan.
 

 

Governor Bevin’s proposed switch to 401(k) defined-contribution plans provide less retirement security for future retired teachers.

  • Defined-contribution plans provide greater retirement security, better investment options and returns, for nearly ½ the costs of a 401(k) style plan.
    Proponents of the switch to defined contributions are quick to provide optimistic scenarios for their proposals, but conservative when reviewing the current pension performance.
    401(k) style retirement plans adopted in Michigan report:
    • The median account balance of employees with a 401(k) plan is just over $37,000.
    • The average balance is roughly $77,000 which provides a lifetime annuity of approximately $400 per month in retirement income at the age of 65 years.
    • In general, according to money manager Vanguard, 401k(k) style plans have a median balance in 2016 of $24,713. The average in 2016 for Vanguard Participants is $96,495
  • While most 401(k) participants in private sector have a safety net of social security, Bevin’s plan eliminates teachers’ ability to get social security under this new plan.
    • If a future retired teacher manages their 401(k) and the market crashes, that teacher has no social security to fall back on.

 

 

This pension reform plan is not competitive and will make it much more difficult to attract the best and brightest into the teaching profession.

  • Teachers, on average, earn 61% less than those private sector workers with similar educational levels.
  • While most private sector companies are in 401(K) plans, they also receive benefits such as: Profit Sharing, Discounted Stock Purchase Plans, Stock Grants, Stock Options, Bonuses, and a wide variety of different forms of benefits and compensation.

 

 

State government is asking Kentucky’s retired teachers to write off or “bail out” a state-owed debt

While we commend the Bevin administration for undertaking pension reform and fully funding the requested contribution last year, this problem has lingered for far too long in Frankfort and should not be rectified on the backs of retired teachers.

A pension isn’t simply a promise or a luxury. Instead, it’s a contractually agreed upon form of compensation that Kentucky’s teachers receive in exchange for teaching our children. Kentucky teachers never missed a payment into TRS, but elected officials haven’t made its requested contribution into this retirement system since 2007. Despite overly ambitious actuarial assumptions, our state government neglected to properly fund our pension system for nine consecutive years. Essentially, the Commonwealth of Kentucky borrowed from TRS to pay for other spending priorities, such as corporate tax incentives and other projects and programs.

The inappropriately-named “keeping the promise” framework only show how cutting/freezing retired and current teacher benefits will result in a strengthening pension system. The Bevin administration has not made one single indication of alternative plans to raise additional revenues to compensate for these funding shortfalls. This plan places the entire burden of funding the $15-20 billion liability in TRS on the backs of current and retired teachers.
 

 

Converting new teachers to a 401(k)-style defined-contribution plan puts the existing pension fund in further jeopardy

Transitioning teachers from the current pension plan, known as a defined-benefit plan, to a defined-contribution plan, commonly known as 401(k) style plan, means that new teachers will not contribute to the existing pension fund and more government resources will be spent by the state in matches under the defined-contribution plan. In addition, allowing existing teachers to withdraw their cash value from the current pension plan to place it into a defined-contribution plan will result in further deterioration of the pension funding stability.

West Virginia, Michigan, and Alaska, which all converted from defined-benefit to defined-contribution plans, all have seen their unfunded liabilities in their traditional pension plan increase dramatically. Converting to a 401(k)-style defined-contribution plan will not only not save the state money, but taxpayers will pay a significant amount of money for conversion costs. In other states that have looked at this issue, the estimated costs of converting traditional pension plans to defined-contribution plans were as follows:

  • $42 billion in New Jersey
  • $37 billion Pennsylvania
  • $11.7 billion in Texas
  • $3-10 billion in Indiana
  • $2.8 billion in Minnesota

 

 

Implementing the proposed changes could result in a mass retirement of teachers

In Kentucky, approximately 25 percent of current teachers are eligible to retire. By making the proposed changes immediately or even over time, these changes could create a mass exodus of experienced teachers from our public schools, which means that many talented educators will no longer teach our children while placing an even heavier burden on TRS’ financial stability because of the benefits to which these retirees will be entitled.
 

 

This is a moral issue

While Kentucky continues to offer massive tax incentives to private corporations that often do not bring about the desired economic impact, proponents of pension reform are quick to simply write off the debt owed to Kentucky’s retired teachers. Cutting teachers’ pension benefits before examining meaningful budget and tax reform signals that the state is not interested ameliorating its failure to properly fund the our retirement system over the past years.

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