Public Retirement Systems Refresher - February 1st 2019
We’ll use this week’s update to take a deeper dive into a specific issue again, and then once the session starts next week, get back to updates.
For well over a decade now, no issue has dominated the General Assembly’s time quite like our public retirement systems – and that trend isn’t expected to change as this year’s legislative session re-starts February 5th following a short break.
Because this matter is as complicated as it is important, now is a good time for a quick refresher course while we wait to see what, if anything, the House and Senate will do during the next two months on this important part of our workforce’s benefit package to attract and retain great workers for the Commonwealth that we need.
When you hear discussion about public pensions, it’s mainly focused on the Kentucky Teachers Retirement System (KTRS) and Kentucky Retirement Systems (KRS). KTRS, which was created in 1938, covers educators from local school districts, regional universities and school-oriented organizations. KRS, meanwhile, began in the 1950s and is comprised of five separate systems that cover state and local government employees, non-certified school staff (such as janitors and bus drivers) and those who work at quasi-government agencies like public health departments.
Altogether, these two systems have nearly 560,000 members, and most are still working in public service or are retired.
In the early 2000s, when the stock market was booming, both retirement systems had enough money, or more than enough in some cases, to pay every future pension benefit they owed at the time.
Just like our own finances, however, unforeseen events can change projections, and that’s exactly what we saw happen in the aftermath of a recession in the mid-2000s and the Great Recession that began in 2008. Investment returns and government budgets alike went into steep decline. The attached slide from a recent pension task force meeting I attended gives more analysis of the erosion.
The General Assembly began addressing this problem in 2003 and implemented more significant retirement reforms in 2008, 2010 and especially 2013. Beginning in 2014, legislators also began setting aside much more money to begin restoring these systems’ financial health.
Taken together, this twin approach of bipartisan reforms and more funding is giving us the roadmap to bring down the long-term liabilities.
That number is sizable at $43 billion, but it alone does not tell the full story. For one, it’s what is owed over the next several decades; and, two, the systems currently have almost $39 billion in investments that have seen solid growth in recent years. The systems Comprehensive Annual Financial Report (CAFR) actuarial chart on the current systems projected benefits shows the system righting itself in approximately 2042 with required actuarial payments to the system. Think of a snake that has eaten a mouse and time lapse photography shows the mouse bulge flowing through the snake’s body until it’s gone. In our case, that is approximately 2042 per the CAFR and has a lot to do with mortality rates.
Investment earnings are responsible for about half of every pension/health insurance benefit received by public retirees, nearly all of whom still live in the commonwealth. They get about $4 billion annually, which is an economic value in itself. For comparison, farmers received a little less than $6 billion last year for all of the crops and livestock they sold.
Some have asked me why we don’t offer a traditional 401(k) to new public employees. The short answer is because it would cost governments billions of tax dollars extra since they would have to make up the employer/employee contributions no longer available to pay down the liabilities. Instead, those contributions would be locked up in individual retirement accounts.
Kentucky is also not alone offering defined-benefit retirement plans; most state and local governments across the country have them as well.
The 2013 reforms did implement a hybrid system similar to 401(k)s in some key ways, and this new plan applies to KRS members, legislators, and judges who joined the system after that year. Employees and employers still pay their contributions as before, but the employees are no longer guaranteed a defined pension benefit. Instead, their retirement is based on those employer/employee contributions and KRS’ overall investment growth, which can then be annuitized at retirement.
Those 2013 reforms did not affect teachers, but that was by design, since they are not eligible for Social Security due to a decision made back in the 1950s. There is uncertainty whether new teachers would even be allowed to enroll in the federal program, and if they could, it would be especially difficult for cash-strapped school districts since they would have to pay six percent more for each new teacher as the local employers.
Given that KTRS already has more than half of the funding it needs for the next several decades, I don’t believe moving in that direction makes financial sense, and while the future is tough to predict, the system appears well-positioned for it. Another consideration is that reducing retirement benefits for new teachers would also make it harder to attract younger people to the field.
There have been secret and rushed attempts over the last year to push through new retirement reforms, but those have ultimately gotten nowhere. Legislative leaders are at least showing greater willingness to listen this year, since they formed a bipartisan public pensions working group a month ago that has already met for a half-dozen times and I’m attending every one of them. Its goal is to see if any consensus can be reached, either this year or in time for next year’s legislative session.
As I mentioned, I believe we are already on the right track, but if anything should pass in the weeks and months ahead, it must have input from those affected; it must not cost taxpayers more than current projections; it must not undermine already-promised benefits; and it must not make it more difficult to retain and hire the public-service employees we need and deserve.
I hope this brief review has helped to shed light on why this issue has often been at the top of the General Assembly’s agenda for so long. I will of course keep you updated on what may happen next.
At the same time, I need to hear from you as well. You can write to me at email@example.com, and the toll-free message line is 1-800-372-7181. If you have a hearing impairment, please call 1-800-896-0305.
The legislature’s website also has a lot of information online and can be found at www.lrc.ky.gov.
Thanks for all you do and never hesitate to call anytime.