For Immediate Release: Friday, March 30, 2018
(FRANKFORT, Ky.) –– The new cash-balance retirement plan passed by the General Assembly and sent to Gov. Matt Bevin’s desk late Thursday night represents a monumental policy achievement and accomplishes real reform by ending an era of poorly run defined benefit pension systems that placed undue risk on taxpayers while creating a $60 billion unfunded liability, one of the nation’s largest and most-dangerous pension holes.
“Senate Bill 151 stops the digging and includes safeguards to ensure future generations never again have to face such threats to Kentucky’s economic security,” Bluegrass Institute president and CEO Jim Waters said. “SB 151 appears to be a true common-sense compromise between the ideologues who sought to maintain the status quo and those advocating for placing all new hires into a straight 401k-style plan.”
SB 151 is similar to Senate Bill 1, which was posted for passage earlier this month before being recommitted to the Senate State and Local Government Committee, but removes some of the earlier legislation’s controversial proposals, including reducing the annual 1.5 percent cost-of-living adjustments for Teachers’ Retirement System (TRS) retirees, which includes teacher and administrators
The bill achieves significant reform by:
- Reforming TRS sick-day benefits.
Current teachers and administrators will no longer be able to count payments for sick-leave days accumulated after Dec. 31, 2018, toward their lifetime TRS pension payments.
- Prohibiting state workers from applying future unused sick days after July 31, 2018, toward service credits in a manner that allows them to retire early.
- Ending the double dipping in the Kentucky Retirement Systems by mandating that state employees retiring after Jan. 1, 2019, and returning to state jobs would not get a second retirement account.
- Increasing the age that new teachers and administrators in the TRS would be eligible for retirement to age 65 with five years of service or the “rule of 87,” which requires beneficiaries’ combined age and years of service to equal 87 before reaching retirement eligibility.
- Limiting the “inviolable contract,” which protects reduction in future benefits, to only covering the cash-balance accounts.
Retirement payments should now be much-more aligned with contributions made by both the employer and employee rather than the previous defined benefit systems, which produced arbitrary, artificially high and ultimately unaffordable benefits.
- Establishing a 17-percent shared investment:
- teachers contribute 9.105 percent of their salaries (similar to their current contributions)
- the state adds 6 percent
- local school districts provide 2 percent
Placing new employees in cash-balance plans – because of the way such plans function – will ensure that benefits have a mathematical relationship to actual investment returns rather than to assumed rates of return determined by actuaries beholden to the systems and susceptible to political pressures.
“One of the most important protections this approach provides is preventing the abusive practice of enhancing benefits retroactively while guaranteeing them prospectively at levels nowhere close to being properly prefunded, which is absolutely critical if defined-benefit systems are to avoid creating these huge liabilities,” Waters said. “Such dishonest practices have played the leading role in creating our commonwealth’s current pension crisis.”
“At least now with this cash-balance plan, more of the risk will be shared by beneficiaries and less by taxpayers,” he added.
An analysis of the hybrid cash-balance plan created by Senate Bill 1, upon which HB 151 is largely based, estimates that a teacher starting at age 27 in a Franklin County classroom and retiring at age 57 after working 30 years, would – using an 85 percent interest credit like the bill passed Thursday does – will have an account balance of $717,069 when they retire, from which they would receive an annual annuitized benefit of $62,760.
However, an important difference between the previous defined-benefit approach and the new cash-balance policy that further protects taxpayers is that the actual amount of retirees’ annuity payments will be determined by life expectancy at the time of their retirement whereas the defined-benefit system failed to properly accommodate for increasing longevity.
“That will likely produce huge savings across-the-board,” Bluegrass Institute Pension Reform Team director William Smith said. “In fact, we anticipate this approach which we’ve supported for years will result in even larger savings to the TRS system than currently anticipated. It’s a significant change.”
An unsustainable policy of guaranteeing the annual 1.5 percent COLA and not properly accommodating increasing longevity when determining lifetime pension benefits along with awarding retroactive benefit enhancements and promising unaffordable prospective benefit levels all combined to contribute to the huge liabilities Kentucky finds itself facing today, Smith said.
“This bill adequately addresses most of the problem areas,” he said.
The Bluegrass Institute has for years taken the unpopular position that Kentucky’s pension crisis is primarily the result of excessive benefits rather than poor investment returns or a lack of funding.
“We congratulate our legislative leaders for their persistence and determination in passing legislation that substantially lowers future benefit-accrual rates while simultaneously providing for a solid future retirement income for our teachers and state workers,” Waters said. “This reform ensures retirees continue to receive their monthly income while future public employees and teachers will have a solid, protected and secure retirement that more closely reflects their contributions, those of their employers and actual, accurate returns on their invested funds by their systems.”
Click here for the Bluegrass Institute’s Pension Reform Team’s analysis of the state Senate’s pension reform ideas.
For more information or comment, contact Bluegrass Institute president Jim Waters @ 270.320.4376.