click the button for background
Fully fund the statutorily required obligation to the Medical Insurance fund as required by HB540, the 2010 Shared Responsibility Law according to KRS 161.550 and 161.420.Fully fund TRS in accordance with the Commonwealth’s pension-contribution statute (KRS 161.550).
Maintain the defined benefit system currently in place for Kentucky’s retired, current, and future teachers.
Maintain TRS independence and the board structure remain unchanged.
In 2007, the Teacher’s Retirement System (TRS) was almost fully funded. Missed actuarial assumptions due to the 2008 financial crisis — combined with the failure of Kentucky state government to fund the requested contribution each year — resulted in the deterioration TRS’ financial stability. Today, because of this oversight, TRS now is only 57 percent funded with an unfunded liability of roughly $15 to $20 billion dollars.
The pension-contribution statute (KRS 161.550) sets forth a two-pronged funding approach from contributions from school districts and the state. The first uses a percentage of pay formula to fund the pension. However, the last paragraph of this statute requires that if the percentage contribution from school districts and teachers doesn’t cover what is needed for the actuarially required contribution amount, the state, in its next budget, is required to fund the difference. This is what the state failed to fund for nearly a decade.
During the 2018 legislative session, many of the same politicians who criticized past administrations for not properly funding the state’s public pension systems did the very same thing to this medical trust fund.
While the two-year budget allocated funds to this insurance fund in 2019, it ignored the state’s obligations in 2020 — in direct violation of HB540 – the Shared Responsibility legislation passed in 2010 that addressed this funding issue. Luckily there was a budget surplus and the General Assembly mandated that any surplus funds get allocated to the Medical Insurance Fund.
The Kentucky General Assembly must live up to its prior commitment to adequately fund the Teachers’ Medical Insurance fund in accordance with HB540, the 2010 Shared Responsibility Solution.
As more and more teachers retire, the state’s failure to contribute its actuarial share to the insurance fund stresses the system by forcing reductions in benefits and possibly the elimination of coverage. This will result in:
• Increased healthcare premiums
• No insurance coverage for dependents
• Coverage changes
• Loss of access to affordable coverage
Retirees do not collect social security benefits. Significant increases in healthcare coverage or loss of coverage altogether could be financially devastating to our retired teachers and their families.
As a result, these proposed reform measures generated public outrage and protests, several of which were either withdrawn or did not garner enough support for passage. The most recent reform measure proposed – SB151 – was amended to a sewer-wastewater bill late in the 2018 session and hastily passed through committees and both legislative chambers within hours of being introduced — without testimony, economic scoring, or proper evaluation. As a result, the Kentucky Attorney General filed suit and the Kentucky Supreme Court found that SB151 was unconstitutional on Dec. 13.
TRS performed an actuarial analysis showing that the “Keeping the Promise” plan would cost taxpayers an additional $4.4 billion over the next 20 year when compared to retaining the current pension system with full funding. An independent analysis of the plan performed by GRS, an actuarial consulting firm, was never released despite several promises to the contrary.
Switching plan types introduces a significant amount of transition costs to both the taxpayer and beneficiary. States such as New Jersey, Pennsylvania, and Texas saw potential transition costs estimated to be $42 billion, $37 billion, and $11.7 billion, respectively. This is why many states, with the exception of a few, have been reluctant to switch to this type of plan.
Defined-contribution plans provide greater retirement security, better investment options and returns, for nearly half of the costs of a 401(k)-style plan.
Michigan, which switched from a defined contribution plan to a 401(k) style retirement plan, reported:
• 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 Vanguard, 401(k)-style plans have a median balance in 2016 of $24,713.
While most 401(k) participants in private sector have a safety net of social-security benefits, Gov. Bevin’s plan does not provide teachers the ability to receive these benefits. If future retired teachers manage their own 401(k)s and the market crashes, those teachers have no social security to fall back on.
Phasing out the defined-benefit plan in favor of a 401(k) plan means that new teachers will not contribute to the existing pension fund and more government resources will need to be spent to keep the system solvent.
West Virginia, Michigan, and Alaska all converted from a defined-benefit plan to a 401(k)-style plan and each saw the unfunded liabilities in their pension systems increase dramatically.
• In West Virginia, the total unfunded liabilities of its pension fund more than doubled, ballooning to $12.4 billion by 2014. West Virginia switched back to a defined-benefit plan.
• In Michigan, the pension plan that was funded 109 percent in 1997. The state closed the plan to new employees. Since closing it to new employees, the funding status dropped approximately 60 percent, exposing $6.2 billion in unfunded liabilities.
• In Alaska, the switch to a 401(k)-style plan was sold as a way to reduce its unfunded liabilities. Instead, the total unfunded liabilities increased as a result of shutting down new contributions to the plan.
A case study written in 2018 found that the town of Palm Beach, Florida switched from a DB to a 401(k)-style DC pension plan in 2012 and shortly after experienced an exodus of more than 100 public-safety workers in the span of only four years. The town was so impacted by the exodus and the charges that came from replacing and retraining workers. In 2016 the town voted to change their decision and return the workers to a DB pension plan. Read more, including the full case study at this link:
https://teachfrankfort.org/new-case-study-examines-dismantling-pensions-triggered-mass-exodus-public-safety-workers/
As we look to fix our pension systems, a new approach must be taken.
For an issue that affects thousands of current and future retired teachers, any pension reform efforts should, in good faith, be an open and transparent process with adequate time to evaluate the effectiveness and unintended consequences of specific reforms. For long-term pension reform to be effective, we request that:
• All stakeholders must be heard, negotiated with, have the ability to testify and ask questions, and given the time to properly evaluate any bill that is brought before the General Assembly.
• Name-calling, political tribalism, fabricated charges, and false accusations should end; these actions make compromise difficult, if not impossible, and they should not be used by any person or party during the upcoming legislative process.
Read more about the importance of transparency with pension reform
On March 29, the last day of the 2018 session, a 291-page pension-reform bill was attached to a sewer-wastewater bill at the last minute. It quickly passed through committees and both chambers of the General Assembly without adequate time to read, review, evaluate, financially score, or ask questions about the proposed legislation.
The bill did not contain COLA reductions and retired teacher health benefits would be left alone during the next two years. Current retirees would be able to remain in their defined-benefit pension plan, but new hires would be required to enroll in cash-balance hybrid plans.
On June 20, 2018, the Franklin Circuit Court held that SB151 was unconstitutional. The Kentucky Supreme Court unanimously upheld this decision on Dec. 13 on the grounds that SB151 did not provide the constitutionally required three public readings in both in the Senate and House prior to being passed.
TRS is a best-in-class pension system that is nationally recognized for its risk and administrative management and has consistently ranked in the top 5 percent in the United States for its investment returns.
Some of the recent pension-reform proposals have called for Kentucky’s three primary retirement systems (TRS, KERS, and KJRS) to be consolidated into one system.
Independence has allowed TRS to maintain sound governance and fiduciary accountability to its members. The result is TRS has been nationally recognized for its investment returns and administrative management and not subjected to some of the issues that Kentucky’s other retirement systems have faced.
• TRS has maintained a well-balanced, conservative investment portfolio.
• TRS has never invested in hedge funds or subprime mortgages.
• TRS never allowed or used placement agents.
• TRS has generated an 8.39 percent average return over the past 30 years.
Despite its independent status, the Public Pension Oversight Board, which was established by the General Assembly, can compel any one of Kentucky’s pension funds to disclose any of its activities and make recommendations to the Legislature on laws governing the systems.
KERS – which has a 17-member board of trustees that is dominated by 11 gubernatorial appointments and only six elected members – has been subject to politics, questionable investments, kickbacks, and scandals over the years. One of the pension systems operated by KERS, the Non-Hazardous Employee Fund, is only funded at 12 percent and is on the brink of failure due to mismanagement.
The Public Pension Oversight Board, in part, was created due to the historical issues of mismanagement on the part of KERS, not because of management issues with TRS.
The Kentucky Teachers’ Retirement System must maintain its financial and administrative independence. TRS must be allowed to continue operating independently so it can remain fully accountable to its members as opposed to the governor, politicians, or the ever-changing political climate.
Combining these retirement systems would put in jeopardy TRS’ best-in-class investment performance, risk, and administrative management and be a disservice to its membership.