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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
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 puts a freeze on cost-of-living adjustments (COLA) for both current and retired teachers.
In real terms:
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.
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.
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:
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.
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.