1. Implement a TRS hybrid plan for new teachers.
Teachers should have access to a defined benefit plan that’s safe, dependable and designed for the workforce of 2020 and beyond. Taxpayers also deserve to have safeguards in place to protect them from the poor decisions of the past that have resulted in a debt now due. We believe the Teachers’ Retirement System (TRS) hybrid plan is the answer.
2. Stop using the accrual of sick days to enhance retiring teachers’ final compensation.
Teachers should be compensated at retirement for unused sick days. It’s wrong, however, to apply this spike in compensation to the final calculation used to determine the amount of a lifetime pension. Healthy and well-funded pension systems don’t allow this to take place.
3. Stop the practice of annualizing service credits: No longer can one month be equal to an entire year!
Some Kentucky Retirement Systems’ (KRS) employees retire after working one month of their final year but receive “credit” for a full year’s work. If employees are granted a year of service credit, they should be required to work the entire year, not just the first month.
4. Stop awarding reciprocity for legislators.
In 2005, the legislature passed the “Greed Bill” allowing lawmakers to greatly increase their annual pension amounts through a process called “reciprocity.” This policy allows lawmakers to take other high-paying government jobs near the end of their careers and then apply the often much-higher salaries from those new positions to prior years of service when determining their annual legislative pension benefits. This practice creates the opportunity for pensions to increase substantially. While the legislative pension fund is small and almost fully funded, passing the Greed Bill was clearly wrong. Current legislators should lead by example and end reciprocity.
5. Modify the inviolable contract to stipulate that earned benefits cannot be increased or reduced.
The primary cause of Kentucky’s current pension crisis was the use of retroactive benefit enhancements. In the late 1990s and early 2000s, legislators enhanced benefits for state employees without any cost analysis. Worse, many of the enhancements were applied retroactively to those employees’ first date of employment. While the inviolable contract states that benefits which have been earned cannot be reduced, it should be amended to also affirm that benefits already earned cannot be retroactively increased.
6. Create a “QERS” plan within KRS with quasi-specific assets, liabilities and assumptions.
Demographics of workers at quasi-governmental agencies within the Kentucky Employees Retirement System (KERS) differ from those of traditional state employees, including in the areas of length of service, annual salary and life expectancy. Quasi employees, therefore, should be removed from KERS and have their own pension system under the KRS umbrella with accurate actuarial assumptions that apply only to their group of beneficiaries and more fairly represent their liability to the system.
7. Stipulate that investment-return assumptions can only be adjusted by a maximum of 25 bps (one-fourth of a percentage point) and payroll growth-rate assumptions by 50 bps (one-half of a percentage point) per year.
While we’ve been advocates for utilizing assumptions that are accurate instead of arbitrary, we cautioned the KRS board against making large changes all at once to actuarial assumptions regarding investment-return and payroll-growth rates. The subsequent impact on local municipal budgets has, unfortunately, been extreme. A gradual change over several years would have been preferable. Limiting future changes in investment-return assumptions to .25% per year and payroll growth-rate assumptions to .5% per year would be a responsible way to address future discrepancies.
8. Enable the Public Pension Oversight Board to hire an independent, objective actuary to review proposed legislation and pension provisions.
Allowing TRS and KRS to hire their own actuaries has the potential to create an inherent conflict of interest. Actuaries have enabled Kentucky’s pension crisis by willfully using erroneous assumptions and not sounding the alarm when poor decisions were made by previous legislatures and administrations. The Public Pension Oversight Board (PPOB) should be allowed to hire its own objective and independent actuary to report true and accurate data to legislators in Frankfort. This would be preferable to the current structure which often results in actuaries being reluctant to speak the truth.
9. Change the Tier 3 KRS investment credit formula to a zero percent guarantee plus 80% of the 10-year net KRS return.
The investment credit formula for Tier 3 KRS employees should be changed in order to balance more effectively a guarantee for workers with safeguards needed for a sustainable retirement system. The investment credit should have a zero percent guarantee (meaning you can’t lose money even if the market declines and stocks fall) plus 80% of the 10-year net KRS return.
10. Increase transparency in Kentucky’s public pension systems.
The Kentucky General Assembly in 2017 passed legislation subjecting lawmakers’ pensions to the Kentucky Open Records Act. The next step would be to make more information regarding retirement benefits being paid to state workers and teachers available to taxpayers who fund the pension systems. While state workers’ compensation is a matter of public record during employment, their retirement benefits are cloaked in secrecy. More transparency ensures that information is available to make good policy decisions in the future.