The pension-contribution statute (KRS 161.550) sets forth a two-pronged funding approach that requires contributions to the Teachers’ Retirement System (TRS) from teachers, school districts, and the state. The first approach requires teachers and school districts to use a percentage-of-pay formula to fund the pension. The second approach requires that if the percentage contribution from school districts and teachers does not cover what is needed to cover the actuarially required contribution amount, the state, in its next biennial budget, must fund the difference.
While Kentucky’s teachers have never missed a payment to TRS, Frankfort failed to fully fund its share of TRS from 2007 to 2016.
In 2007, TRS was almost fully funded. However, missed actuarial assumptions due to an unprecedented financial crisis, the Great Recession — combined with the failure of the Kentucky state government to fully fund its contribution as required by law — resulted in the deterioration of TRS’ financial stability. Today, because of this oversight, TRS is only 58-percent funded, with an unfunded liability of roughly $15 billion dollars.
Investment Income, not tax dollars, pays for the majority of benefit payouts
Approximately 70 percent of benefit payouts to Kentucky’s retired teachers are derived from investment income. Based on actual historical investment performance, failure to contribute a dollar now will result in the loss of another dollar in investment income over the next 10 years. It isn’t just about the loss of the initial contribution, but rather the loss of the compounded interest on this contribution over the years, that leads to the deleterious effects and underfunding of a pension fund.
If Frankfort properly (and routinely) makes its actuarial contribution to TRS as required by law, the solvency of the retirement system will improve and eventually be fully funded
Thanks to full funding in recent years and a nationally recognized investment performance, TRS’ unfunded liability has improved by more than two percentage points — to 58 percent – over the last couple of years. Actuarial experts have stated that if the state funds TRS in accordance with the pension-contribution statute, TRS will reach 100 percent funding.
Since 2017, the Kentucky General Assembly has funded its actuarial required contribution (ARC) to TRS as required by law.
For the past five years, the Kentucky General Assembly has made its full contribution to TRS. While not at full funding, if the KY General Assembly continues to fully-fund its actuarial required contribution to TRS, the pension fund is on track to eventually reach 100 percent funding.
While contributions to TRS has remained steady, we must continue to fight the urge of elected officials – particularly during economically challenging times – to forgo its fiscal responsibility to TRS for other funding priorities. We must encourage our elected officials to stay the fiscally responsible course and fully-fund the ARC to TRS as required by law.