Pension spiking problems persist

Pension spiking provisions and sick leave policy costs to Kentucky taxpayers have been major topics for the Public Pension Oversight Board (PPOB) during this interim session.

Currently, members of the Teachers' Retirement System (TRS) can accumulate unused sick days for a lump sum payout at their time of retirement. Though the payout is 30% of their daily pay rate, the sum is calculated using their final salary, not the salary earned when the sick day was accumulated, artificially inflating the payout.

However, the major cost to taxpayers is the practice of adding that lump sum payout to the teacher’s final salary. A teacher’s overall post-retirement pension payments are determined by their salary the final three or five years (depending on the beneficiary’s pension tier) of employment. Thus, adding that sick leave lump sum to the final salary once again artificially inflates the cost to taxpayers for the rest of that educator’s lifetime - a practice known as “pension spiking.”

At Monday’s PPOB meeting, Beau Barnes, TRS Deputy Executive Secretary, indicated that some school districts are allowing teachers to convert unused personal days to sick days to further inflate their final salaries and therefore over-enhance their lifetime pensions. That cost to the state is unknown as TRS does not have data on which school districts are allowing that practice.

Sick leave pension spiking was addressed in a BIPPS-backed plan passed by lawmakers in the 2021 legislative session. However, it only fixes the issue for TRS members hired after January of this year. The issue of pension spiking for educators hired previously to 2022 continues.

According to Barnes, the cost to taxpayers if lawmakers don’t fix this sick leave policy is about $47 million per year. Currently, the state owes $408 million in unfunded sick leave costs. However, if paid out over the planned 20-year period, the cost to taxpayers nearly doubles.

For the past several years, legislators have taken a serious approach to addressing the commonwealth’s pension crisis by fully funding the state’s pension systems - a cost of over $1 billion per year to taxpayers. On top of that, lawmakers appropriated an extra $479 million in the most recent biennial budget to pay down TRS debt. But if they are serious about addressing all the issues contributing to this high cost to taxpayers, they will take a hard look at sick leave reform for current employees. The current sick leave policy is not in the inviolable contract and would only take a simple statutory change to save taxpayers hundreds of millions of dollars.