Funding Kentucky's retirement system.
At a recent meeting of the Purchase Area Development District, a powerpoint presentation showed the levels of funding for the eight retirement programs run by the state. The outlook is bleakest for state retirees. Legislative pensions were shown to be 85% funded. Murray Mayor Jack Rose joked that the charts were wrong because legislative retirement was funded up to 99%.
Pensions in Kentucky regarded as the "inviolable contract" are under siege. Supporters of Governor Bevin's position on converting retirement to a 401K plans believe that changing times require changing retirement plans. Retirees and state workers strenuously disagree.
Fueling the distress many of them are feeling is the release of a 113 page report "Pension Performance and Best Practices Analysis" prepared for Kentucky by Public Finance Management (PFM ) in conjunction with PRM Consulting Group, Inc. and Stites Harbison PLLC. The report, one of three, focuses on saving money on retirees, present and future. (The report is linked at "more" below. Readers, especially those on any state, local or educational payroll, are strongly advised to download and read the report for themselves.)
Among the recommendations are:
- "Maintain the provision for retirement at age 55 for Tier 1 and 60 for Tiers 2 and 3, but eliminate eligibility for normal retirement at any age with 25 years of service.." Page 54
- University and nonuniversity employees - Social Security (generally not nowprovided for non-University members)
Primary outcomes: Defined Contribution: 2% minimum employer contribution + 50% match on first 6% optional employee contribution above a 3% minimum employee contribution (i.e. 5% employer maximum, 14% total maximum)
- No conversion of accrued sick leave, compensatory or any other leave time to pension benefits.Sick leave to be taken before retirement.
Other Adjustments KERS- NH, CERS-NH, JFRS
- For Tiers 1 and 2, freeze accrued benefit associated with prior service protected at levels based on plan and date of hire, with no further accrual (although the benefit value will increase as the final average salary component of the defined benefit formula increases)
- Tier 3 members would see the account value of their accrued cash balance benefit rolled over into the new defined contribution plan.
- Normal retirement age of 65 would apply (employees can retire earlier with an actuarially reduced benefit).
- No conversion of accrued sick, compensatory, and any other leave time toward pension benefit.
.Of special interest to Kentucky school districts is a change for new hires, defined as employees hired in 2014 and after. Presently, teachers are not eligible for social security. That has proven a mixed blessing: school boards and teachers aren't tapped to pay into the federal system. But on retirement, teachers realize they are totally dependent on the Kentucky Teacher Retirement System (KTRS).
The report recommends a change to that plan:
"In addition to the fiscal impacts illustrated above, the enrollment of teacher new hires in Social Security is estimated to have gradually building financial impacts on local School Board employers. The estimated Social Security employer tax paid by School Boards in total is approximately $11 million in the initial year, increasing by roughly $10 million per year for the first ten years thereafter.
The estimated contribution paid by School Boards in FY 2029 is $136 million, further increasing to $201 million by FY 2034." Report, page 110
One of the biggest changes for teachers is the recommendation that no one retires with full benefits after 25 years of service, The choice for those who desire to do so is to take a reduced amount or wait to get benefits at age 65.
The report does not address increasing state revenue to offset the deficit. That should not come as a surprise. It's not what the report preparers were asked to write.
Kentucky's retirement system struggles with return on investment issues despite the fact that the stock market has tripled, rising from a low in 2008 of 7350 to 21000 in 2017. As of this writing, there have been few, if any, negative consequences for those running the system.
Governor Bevin hasn't issued a call for a special session yet. That's predicted for either October or November and will cost Kentucky taxpayers $70,000 a day.
Retirements of government employees has jumped since the issuance of the reports. Potential retirees are being told to get out now at whatever benefit is available or wait and see what the General Assembly will do. Many are opting not to wait. While lawsuits will surely follow legislative action, there is zero assurance that state employees will prevail in the judicial system.
As one retiree remarked ruefully, "Whatever happens is in place. Not much the courts can or will do to roll back.."
Already protests and letter writing campaigns are being organized. Those wishing to make their opinions known can find their legislator at Find Your Legislator.