Kentucky educator groups have finally produced some suggestions for reforming our ailing pension system. Initial reactions to Governor Bevin’s proposed pension bill largely took the form of denying there was actually a pension crisis or arguing that no changes should be made other than to pour more money into the system. I was dismayed by this intransigence on the part of my fellow educators and argued that we needed to come forward with some real alternatives if lawmakers and everyday Kentuckians were going to take us seriously.
Earlier this week a coalition of education groups proposed a “Shared Responsibility Plan,” offering their first specific suggestions for pension reform. In a rather lukewarm endorsement, Kentucky Association of School Administrators Executive Director Wayne Young wrote to the organization’s members that opposing the Governor’s plan was still the priority and that the “Shared Responsibility Plan” was “the only alternative anyone has put forth at this time” but should be the starting point for further discussion.
I’m glad these education groups, which wield enormous influence over rank and file teachers, have finally made some suggestions of their own. And I’m especially encouraged that the Shared Responsibility Plan actually makes some real structural changes in the pension system. It calls for no changes for current retirees and few changes for active employees, but recommends more substantive reforms for new employees entering the system after July 1, 2018. Personally I am concerned that the Shared Responsibility Plan does not go far enough in reforming the system to make it more sustainable and affordable for the long-term, but it may nevertheless set the stage for more meaningful discussion and compromise on this critical issue.
My comments that follow focus exclusively on the competing proposals for KTRS. Both the Governor’s plan and the educator groups’ plan include reforms for the County Employees Retirement System (CERS, in which school district employees who are not certified educators participate). I lack the personal knowledge of CERS to discuss that component of the pension system. As always, let me emphasize the views I share on this website are always mine alone and do not reflect any official opinions of Western Kentucky University (where I work and where I am still a contributor to KTRS) or the Kentucky Board of Education (where I am a member, appointed by Governor Bevin in 2016 for a four-year term). If I’ve misunderstood any portion of either the Governor’s plan or the educator groups’ plan regarding KTRS, I invite readers to contact me with corrections.
Current retirees: No changes under Shared Responsibility Plan
Governor Bevin’s pension proposal imposed a five-year freeze on Cost of Living Adjustments (COLAs) for current retirees. This was the only change suggested for current retirees, but has also been controversial given that teachers pre-pay for these COLAs while serving as active employees. A key priority for the educator groups has been to protect current retirees from any changes, and their alternative plan does not include any revisions to the current system in this regard.
Active Employees: Sick days and the retirement calculation formula
The educator groups’ pension proposal involves only two provisions for active employees. This includes a “freeze,” after July 1, 2018, on accrued sick leave for retirement calculation purposes. I’m assuming this means that any sick days an employee has accumulated until that point will still be used in retirement calculations at the point of their retirement, but going forward any additional sick days would not.
A sick day provision is also included in the Governor’s plan, but it would end the use of sick days in retirement calculations altogether. Employees could still cash in a portion of their accumulated sick days at retirement; this cash amount would just not figure into their final year’s salary for retirement purposes.
The Shared Responsibility plan also involves an adjustment in the formula used to calculate retirement benefits for any future retirees after July 1, 2024. I don’t pretend to fully understand the complex formula used for this purpose, but it involves a component that multiplies years of service by a factor somewhere between 2.0 and 3.0. Under the current system, teachers who reach 30 years of service in the system get to use a full 3.0 “multiplier” in calculating retirement benefits. The Shared Responsibility plan would eliminate that practice in 2024 (presumably setting this calculation at some factor lower than 3).
Governor Bevin’s plan includes a host of additional changes for active employees to take effect in 2018 or 2023, including shifting them out of the current pension system when they have reached 27 years of service, forbidding future retirees from working full time in any state role while drawing pension benefits, freezing COLA’s during the first five years of retirement, basing retirement calculations on the average of the five highest years' salary, and imposing a new 3 percent contribution on active employees to pay for current retirees’ health insurance.
Future employees: Educator groups make their biggest concessions
The Shared Responsibility Plan put forward by educator groups makes the biggest structural changes in the pension system in its suggestions for new teachers hired after July 1, 2018.
The plan would establish new eligibility thresholds for retirement, using a “rule of 85,” meaning employees would become eligible for retirement when the combination of their age and years of service in the system equals 85.
Presently, a teacher who enters the system right out of college, say at 22 years old, is first eligible for retirement after only 27 years of service (age 49). Under the proposed system, that same employee would need to work until at least age 53 and a half (53.5 years old plus 31.5 years of service equals 85). By keeping employees working longer, they’ll contribute more to the system over time and perhaps also draw less out, helping create more financial stability in the system.
Like the Governor’s plan, the educator groups propose basing the retirement calculation for future employees on their highest five years of salary (rather than the highest three), providing a benefit that more accurately reflects the employee’s actual salary. New employees would also not be able to use accumulated sick leave in their retirement calculation, though they would still receive a partial “cash-out” benefit.
Perhaps of greatest significance, the Shared Responsibility Plan includes some risk controls to protect taxpayers from ballooning future liabilities. If liabilities emerge that are larger than the state’s annual contribution to the system, the plan calls for the burden of covering the unfunded liabilities to be shifted to employees and school districts, with additional austerity measures possible including COLA freezes and changes in the service retirement factor (of course, more burdens for school districts also means more burdens for local taxpayers).
Finally, the educator groups propose that the pension system for future employees continue to function as a defined contribution plan, with a voluntary option for employees and districts to contribute to a 403b investment account. This is in marked contrast to the Governor’s plan, which would have moved all future employees into a mandatory 401k-style plan with no defined benefit (i.e., guaranteed pension) component.
Sizing up the differences
Educator groups have regarded the current pension system for active employees and current retirees as an “inviolable contract” which, therefore, cannot be substantially changed. I’m not an attorney, so I can’t say whether this is a legally firm position, but philosophically I agree with the idea that employees who entered the system with a certain expectation for what their retirement benefits would be have a strong claim that the state should deliver the same. The Shared Responsibility Plan put forward by educator groups is consistent with that position and preserves the “promises” made to current employees and retirees.
The question is whether the state can afford to keep the current system given the massive liabilities that have accumulated ($14.5 billion for KTRS alone). The status quo is not sustainable. So a key question is how much money either of these competing plans would cost or save, and how we would go about trying to calculate those savings relative to unknown costs (like how many teachers might retire in the near term, how much money would have to be siphoned away from other aspects of the state budget to cover the mounting liabilities, or how much progress toward covering the liabilities would be needed to protect the state’s credit rating). If education leaders or policy makers have any of these calculations, they haven’t come forward with any of them as of this writing. Talking points issued by the educator groups claim that their plan would cost no more than the Governor’s Plan “when all factors are considered,” but no evidence for this assertion is provided.
The Governor’s plan would theoretically result in making rapid progress toward reversing the huge liabilities the pension system has accumulated (though this might be partly offset by a mass of retirements in the near term). The educator groups’ plan would ease some pressure on the system by making changes to sick days and the multiplier, but not changing anything for active employees would seem to contribute further to the liabilities, barring a massive influx of revenues. As I initially wrote about the pension crisis, additional revenues are going to be needed to recover regardless of the structural changes we make in the pension system, but it’s impossible to see how revenues alone can fix what’s wrong without those structural reforms.
These potential fiscal impacts have to be weighed alongside the philosophical considerations that are perhaps equally important to this discussion. As a matter of fairness I believe we should try to preserve as much of the benefit structure for current employees as we can, weighed against the imperative that we do something bold about the liabilities the system has accumulated. Given that P-12 educators do not pay into or receive Social Security benefits, I also think it’s fair to maintain some defined benefit element for future employees.
But I also think we should acknowledge that, while teaching is a vital public service, the benefits that public employees have enjoyed in the past seem overly generous in the eyes of hard-working taxpayers who themselves have to struggle and sacrifice for their own financial security. The Shared Responsibility Plan makes some important concessions, but I worry it still exposes taxpayers to a potentially unsustainable level of public support at a time when the entire state budget is under threat, even with tax reforms that may bring new revenues.
I believe educators should embrace a genuinely hybrid pension plan for future employees, one that combines a more modest defined contribution component with a 401k-type element that allows employees to diversify their retirement investments and have some sense of control over where their money goes (just like normal people who save for retirement through a combination of IRA’s and Social Security). A hybrid plan provides a hedge against both market fluctuations and the uncertainties of promises made by past politicians. It might cost more than the Governor’s 401k-only approach, but would perhaps be more affordable to taxpayers in the long-run than the educator groups’ alternative plan.
I hope common sense compromises like these, which would blend elements of the Governor’s pension reforms with those proposed by educator groups, can get traction in Frankfort, and can get the support of educators themselves. Lawmakers have given strong indications that the Governor’s plan lacks broad support as it is currently written. Educators have improved their credibility with the public by finally offering something for discussion. I pray that a civil and sensible dialogue can follow to find a reasonable, financially sustainable, and fair common ground.
Update, 11/10/2017: Yesterday's headlines included news that Cavanaugh MacDonald Consulting, which provides fiscal consulting for the state on pension issues, estimates that the Governor's proposal will cost taxpayers an additional $4.4 billion over the next 20 years and leave KTRS with about $11 billion in remaining liabilities. This is in comparison to not changing the pension system but fully funding it instead (something lawmakers have not done in 10 years), which will still leave the system with about $9.6 billion in liabilities.
As of this writing I can't find a copy of the Cavanaugh MacDonald report to review it for myself, but I don't find these numbers very helpful or illuminating at all. If we're comparing the Governor's proposal to changing nothing but increasing the funding for existing system, how much will it cost to do the latter? The Herald-Leader article linked to above does not say. Presumably it would be less than $4.4 billion, since the Governor's plan also includes full funding for system, but it's not clear by how much. It also does not compare these costs to neither changing the system nor fully funding it, which has been the strategy for many years now. Finally, the Cavanaugh MacDonald report only looks ahead 20 years, which is what these estimates are required to do by law. The Governor's office argues that the real cost savings to these reforms will materialize after that period (actually starting in 2034) because the bill pours lots more resources into propping up the system in the short run.
Last year alone the legislature poured over a billion extra dollars back into the system, making $4.4 billion seem reasonable if it bears savings in the long run. It's just not clear when those savings will be realized or by how much. Nor is it clear how these up-front costs compare to various alternatives. Truthfully, I'm dismayed that any approach discussed so far may still leave a $10 billion hole or more sitting on the table in 20 years. It actually makes me think perhaps none of the proposed reforms so far are drastic enough to meet the challenge.
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Usual disclaimer: Views expressed on this website are mine alone and do not reflect the opinions of Western Kentucky University (where I am associate professor of educational administration, leadership, and research) or the Kentucky Board of Education (where I serve as a member).
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