Update Concerning Recent Pension Legislation

 

Statement from Tim Abrams, Executive Director of KRTA

We hope you and your families had a wonderful Easter weekend. We have received many calls asking about the impact of the legislation that was recently passed. As you know, much of this legislation was thrust upon us at the last minute, so it took us a little bit of time to understand the details. Here is a summary:

Impact of HB 200, budget, on TRS:

• Adds language to appropriate $59.5 million in FY19 from the General Fund to cover the cost of single coverage for members who have retired since July 1, 2010, but are not yet eligible for Medicare.
• Adds language requiring the TRS Medical Insurance Fund to absorb the employer costs of single coverage in FY20 for members who have retired since July 1, 2010, but are not yet eligible for Medicare. Adds language requiring TRS to calculate single coverage members’ contributions in the same manner as in Plan Year 2018.
• Amends language to clarify that the dependent subsidy funded by TRS for members who have retired but are under age 65 takes effect for Plan Year 2019 rather than FY19.
• Adds language to require the employee contribution to the Medical Insurance Fund to remain the same in the 2018-2020 fiscal biennium.
• Removed language transferring TRS personnel to the Personnel Cabinet

 

The bottom line is retired teachers who are not currently eligible to receive Medicare will see no change over the next two years. The state allocated $59.5 million from the General Fund for FY19 and the TRS Medical Insurance Fund will absorb the employer costs of single coverage in FY20.

 

Impact of SB 151 relating to pensions on retired teachers:

• SB 151 has no direct impact on retired teachers

 

Impact of SB 151 relating to pensions on current and new teachers (Based on KCEP analysis):

• Ends the existing defined benefit plan for new teachers and shifts them to a hybrid cash balance plan where benefits depend on market returns. The plan only guarantees a 0 percent rate of return on teachers’ accounts using a 10-year average of investment returns and gives teachers only 85 percent of returns above that 0 percent. It is highly unlikely that 10-year average returns will dip below 0 percent (as they haven’t in the past), meaning 15 percent of teachers’ investment returns will be lost to them.
• Ends the inviolable contract for all new teachers starting in 2019, meaning future legislators could further reduce the benefits under the new hybrid cash balance plan.
• Shifts about 1/3 of the cost of the hybrid cash balance plan to school districts, which must contribute two percent of new teachers’ pay for the benefit. This change will continue the trend of the state backing away from its responsibility to fund K-12 education and asking local schools to bear a larger share of costs. That pattern is creating a growing gap between rich and poor school districts, which is returning to levelsthat were declared unconstitutional in the 1980s.
• Caps the use of sick leave in calculating retirement benefits for current teachers to the amount of sick leave accrued as of December 31, 2018. This change will also add more costs to local school districts that will have to pay more for substitute teachers as use of sick days increases.
• Raises the retirement eligibility for new teachers to age 65 with 5 years of work experience or at least age 57 and an age plus years of service that equal a minimum of 87. Currently, teachers can retire with full benefits at age 60 with at least 5 years’ experience or at any age with 27 years’ experience.
• SB 151 was passed out of committee without an actuarial analysis. KRS 6.350 clearly requires committees to have an actuarial analysis performed on pension legislation before it is reported to the full House or Senate.  The actuarial analysis from provisions of SB 1 were used to predict the actuarial impact of provisions in SB 151 after its final passage by both Houses on March 29. Legislative leaders appeared to make the argument that this would be sufficient to meet the requirements of KRS 6.350.  The Attorney General and other organizations have threatened to sue over the lack of an actuarial analysis when SB 151 passed out of House State Government Committee, which could leave the final fate of SB 151 in the hand s of the judiciary.

 

Impact of HB 366, tax changes, on retired teachers:

• The most direct impact on retired teachers on HB 366 is that it reduces the amount of retirement income exempted from the income tax from $41,110 to $31,110 – meaning many retired teachers would now see some of their retirement income subjected to the income tax. The House later passed a bill to restore the exemption to $41,110 but the Senate has indicated it is unlikely to concur in this change.
• Removed language transferring TRS personnel to the Personnel Cabinet

 

Other tax changes include:

• Cutting the individual and corporate income tax rate from 6% to 5%
• A 50-cent increase in the tax on a pack of cigarettes from 60-cents to $1.10 per pack
• An extension of the sales tax to the labor portion of the bill for repair services. Currently only parts are taxed in repair service transactions.
• An extension of the sales tax to many other services including country club dues, golf courses, dry cleaning, linen and laundry services, veterinarian services for small animals, animal boarding, landscaping, janitorial, diet and weight loss centers, trailer campgrounds, bowling allies, limousine, extended warranties and personal care services.

 

This fight is not over as these bills are now sent to the Governor for final signature.  We are not sure of the Governor’s intent to sign the bills as is or make line item changes where possible.  We will continue to update you as things develop.

 

Kind regards,

Tim Abrams