by Making Connections
The issue of pensions for Kentucky public employees and teachers is complex, and the two main pension systems — the Kentucky Retirement Systems (KRS) and the Kentucky Teachers’ Retirement System (KTRS) — are in distinct but related predicaments.
While a number of factors are at play in the conditions facing these funds, the primary reason for the challenges facing them is the failure of the General Assembly in the past to make the actuarially required contribution (ARC). The ARC is the amount of money that should be contributed annually to pay the normal costs for current employees and the catch-up payments from past underfunding to ensure the system has the resources it needs to pay benefits.
The budget that begins July 1 makes big new contributions to these two plans. Here’s how those contributions break down and some background on what they mean for the systems’ challenges.
Kentucky Retirement Systems
Kentucky Retirement Systems is actually made up of three systems: The Kentucky Employees’ Retirement System (KERS), which contains a variety of state workers; the County Employees’ Retirement System (CERS), which covers primarily local workers; and the State Police Retirement System (SPRS). Within the KERS and CERS systems, there’s a plan covering hazardous duty workers and a plan covering non-hazardous duty workers. This blog will focus mainly on the KERS non-hazardous plan, since it’s the one in the most trouble. KERS non-hazardous currently has only about 17.7 percent of the assets it should have at this point to pay future benefits.
Following legislation that passed in 2013, the state began making the full ARC to this system. In the budget, these contributions are described as a percentage of employees’ pay. For the KERS non-hazardous plan, employers are contributing 40.24 percent of workers’ salaries for pensions in 2017 and 41.06 percent in 2018, amounts that equal the ARC. That’s a big increase from the previous budget, in which 30.84 percent of pay was contributed in 2015 and 2016.
The contribution rate went up in part because the Board of KERS lowered the system’s assumption about the future investment rate of return in recognition of its low level of assets, first from 7.75 percent to 7.5 percent and then down to 6.75 percent. Because it’s now assumed the plan will make less money on investments in the future, current contributions must go up.
Those contributions to KERS non-hazardous from all sources total $633.9 million in 2017 and $653.3 million in 2018. That’s an increase of approximately $324 million in employer contributions over the biennium compared to the previous 2 years. About half of that money comes from the state’s General Fund — the rest comes from other sources.
The new budget also makes additional contributions above the ARC to KERS non-hazardous: $58.2 million in 2017 and $67.6 million in 2018. Extra money is more than justified because the plan is so poorly funded and faces some risk of insolvency. Additionally, the budget includes $60 million in additional contributions over the biennium to the SPRS plan and the KERS hazardous plan.
Kentucky Teachers Retirement System
While state law requires Kentucky contribute the full ARC to the state employees’ plan, it doesn’t yet require the ARC be contributed to the teachers’ plan. Instead, by statute the employer contributes only 13.105 percent of teachers’ pay for their pensions (plus a small additional amount to pay for things like cost of living adjustments to pensions awarded in past years). For the upcoming budget that base contribution amounts to $388.8 million in 2017 and $397.5 million in 2018 from the General Fund. Those contributions are less than half of the full ARC.
This underfunding in recent years has resulted in KTRS’ assets dropping to 55.3 percent of what it should have to pay future benefits. Though KTRS is in a much stronger position than KERS non-hazardous when it comes to its funded ratio, KTRS has continued to be underfunded at a severe level — meaning it would end up in the same boat as KERS non-hazardous without a new commitment to paying the ARC.
For this reason, the new budget puts in another $498.5 million in 2017 and $474.7 million in 2018 to KTRS. That means in total the state funded about 98 percent of the ARC for KTRS in 2017 and 96 percent in 2018. That’s a dramatically higher contribution than the last budget contained.
“Permanent” Pension Fund and Moving Forward
Also, the budget put an additional $125 million into what’s called a “permanent” pension fund from monies transferred from the Public Employees’ Health Insurance Trust Fund. Of that amount, up to $3 million is available for a performance audit of the systems, and a request for proposals was recently issued for that study. The budget language says that the remaining monies in the permanent fund “shall not be expended or appropriated without the express authority within the enacted biennial budget.”
In total, the state responsibly stepped up its contributions to these pension plans in the new budget. But these payments represent just the first step in what must be a long term funding commitment.
Both systems continue to face negative cash flow situations, meaning they are paying out more in benefits than they are receiving in contributions. Because of that challenge, KERS non-hazardous is expected to face a precarious decade before its funded ratio begins to go back up. Volatility in the financial markets could put it at risk. And the state still hasn’t made the statutory commitment to fully fund the ARC for KTRS each year in the future. A version of House Bill 1 this session proposed to do so, but the bill did not pass.
Also, the additional contributions to pensions in this budget were made possible in part by a record amount of transfers of one-time money in the budget, especially the withdrawal of $500 million in total from the Public Employees’ Health Insurance Trust Fund ($125 million of which went to the so-called permanent fund). That amount of extra money is unlikely to be available the next time around. And the extra funding for pensions was also paid for by 9 percent cuts to many services provided by state government and 4.5 percent cuts to higher education — on top of 15 rounds of budget cuts since 2008.
Important strides were made this session in beginning to get these pension systems on the right path. But there is much work left to do in figuring out how to continue making these necessary payments in future years while also starting to restore much-needed funding for critical investments in education, human services and other areas Kentucky must have to thrive.
Kentucky has made strides over the last few decades to expand access to quality public preschool. The recent State of Preschool 2015 report points out where Kentucky has made progress as well as the huge need that remains unfilled, while taking note of concerning recent trends in enrollment.
Kentucky’s comparisons against other states’ preschool programs vary greatly.
- Kentucky ranked 25th in the report in state spending per child enrolled, and 8th in total spending per child enrolled (which includes a time-limited federal grant).
- The state was tied, however, for the largest percent year-to-year decrease in enrollment, with a decline of 1,842 children from the 2014 to the 2015 school year.
- Our access to preschool ranked 21st for 4-year-olds and 10th for 3-year-olds.
- But only 8.1 percent of Kentucky 3-year-olds and only a little over a quarter of 4-year-olds were enrolled in a public preschool program.
Positively, the report placed Kentucky among a handful of states that pay preschool teachers a salary comparable to K-3rd grade teachers. This is an important step in ensuring a high-quality education experience for participating children.
All 173 school districts in Kentucky have a preschool program and each is awarded state money according to a funding formula. One of the reasons Kentucky ranks so high on total spending per child in the report is that in 2013 the state was awarded a federal Race to the Top – Early Learning Challenge grant which yielded a $44.3 million influx of funds. The state is using this money to expand an early childhood care and education (ECCE) quality rating system called STARS that would assess the quality of all early childhood care and education – including day care, Head Start and public and private preschool.
These grant funds are on top of the state appropriation of $71.7 million in the 2015 school year and the federal grant money runs out at the end of 2017. However, the public preschool budget was boosted 26 percent in the 2016 school year at $90.1 million, so state per-child spending will be higher in next year’s report. The 2017-2018 budget years hold preschool funding steady at 2016 levels, but with $7.5 million set aside as a grant for collaboration models between public preschool and private child care providers.
A wide body of research has shown high quality ECCE has a lasting, positive impact on a child’s life; some research has shown that the return on ECCE investment for society is as high as $7 for every $1 invested. A provision in the 2016-2018 budget bill would have increased eligibility to Kentucky’s preschool programs for families earning up to twice the poverty level, but that provision was vetoed, shutting out an estimated 1,000 children. Future decisions about preschool funding should maintain and even improve on the quality of early childhood education, while making it available to more children.
Higher education funding issues in Kentucky have been in the news a lot recently — for ranking among the worst in the country for per-student cuts in a new report; with the public universities and community colleges beginning to implement layoffs, unpaid furloughs and hiring freezes; and as the process of raising tuition for the 2016-2017 school year is nearly finalized. While many of these conversations focus on the impact of cuts on the institutions themselves, we should not lose sight of how these budget cuts hurt all Kentuckians seeking higher education — especially low-income and minority Kentuckians. Budget cuts can mean that these students are:
Less likely to enroll and graduate.
Research shows that students with low-incomes and students of color are less likely to enroll when tuition goes up; due in large part to a lack of resources they are more likely to be dissuaded from attending because of increased cost. Kentucky is already falling short in degree attainment for these students. There are significant gaps in the graduation rates of low-income and underrepresented minority students compared to other students, and little to no progress has been made in recent years. Continued higher education funding cuts will likely worsen the problem.
According to data from the Council on Postsecondary Education the bachelor’s graduation rate for the state was 49.4 percent in 2015, up from 47 percent in 2009. Meanwhile, the bachelor’s graduation rate for low-income students was 36.3 percent — down from 46.2 percent in 2009, and for underrepresented minority students it was 34.8 percent, up just a little from 2009’s 33.2 percent.
Source: Council on Postsecondary Education Dashboard. Data for low-income student graduation rates in 2010 were not available.
Facing more financial difficulties even when they attend community college and receive Pell grants.
Low-income students receiving Pell may be able to use the federal scholarship to cover tuition and fees at a Kentucky community college, but these grants are not large enough to cover the full costs of college (housing, books and supplies, transportation, etc.) — especially for the many adult students at community colleges who often have families to support rather than parents supporting them. In addition, not all students receive the maximum Pell amount.
Source: Elizabethtown Community and Technical College and U.S. Department of Education. Amounts in graph are for enrolling in 12 credit hours for 2 semesters.
More likely to take out additional loans to pay for college.
In 2012, 79 percent of students from families whose incomes are in the lowest 25 percent graduating with a bachelor’s degree had student loans and more than 4 out of every 5 African American students borrowed at public institutions. Students who receive Pell are actually more than twice as likely to borrow and have higher amounts of student loan debt.
In Kentucky we’ve seen the average student loan amount increase 63 percent between 2008 and 2014, with many unable to repay these loans; our state ranks third highest in the rate of student loan default.
Continuing to face affordability problems even with the increase in funding for state need-based aid.
It was an important step in the right direction for the state to fund an additional 8,000 need-based scholarships in the 2016-2018 budget. However, the unmet need is still much greater than this, with more than 62,000 qualified students being denied need-based scholarships due to a lack of funds in 2015 alone. In addition, scholarship amounts are small ($1,900 a year for a full-time student receiving a College Access Program grant) and the purchasing power of these scholarships continues to decline as tuition increases and scholarship amounts do not.
Likely to see reduction in support services available.
Public university and community college presidents gave testimony during the legislative session that budget cuts could lead to the reduction of support services for students who have difficulty navigating aspects of the higher education pipeline and earning a degree; these students are often low-income, minority and first generation college students. Students who are academically underprepared or are the first in their families to attend college often face barriers to completing college. Among the services that can increase the likelihood of successfully earning a degree are intensive academic advising and education/career counseling.
Governor Matt Bevin is expected to announce potential changes to Kentucky’s Medicaid expansion soon, recently telling WLKY that “an amazing amount of work” has gone into a proposal.
Because the governor has developed these changes behind closed doors we don’t yet know the details of the proposal, but he has often mentioned a desire to cut Medicaid costs just as his budget made cuts to education. He often cites Indiana’s Medicaid expansion as a model for changes in Kentucky.
Much is at stake and at risk for our health, economy and quality of life depending on what happens to the program moving forward.
Kentucky’s approach to Medicaid expansion has made it a leader in expanded access to care. We are tied with Arkansas for the biggest coverage gains in the country, as the share of our population without insurance fell from 20.4 percent in 2013 to 7.5 percent in 2015, according to Gallup.
Expanded coverage is the essential ingredient in improving the health of Kentuckians. In the year after expansion took effect, we doubled the number of cholesterol, cancer and other screenings provided through Medicaid. Such tests are critical to identifying and managing conditions early, when they are often easier and less expensive to treat.
Because of expansion, many more Kentuckians can now get care for issues ranging from untreated dental conditions to mental health and substance abuse. Over time, this will lead to a better workforce, a higher quality of life and stronger communities.
That bolsters our economy, as does the injection of federal funds that’s coming with expanded coverage. Medicaid expansion has brought over $3 billion extra to providers so far, and we’ve added 13,400 jobs in the health care and social assistance sector since expansion began. That means more tax revenue for the state, and savings in the state budget from money previously spent on the uninsured. While Kentucky must eventually put in 10 percent of the costs of expansion, that’s a great deal for the commonwealth given the many health and economic benefits we are reaping.
Despite all these gains, Gov. Bevin may propose changes that roll back progress by introducing barriers to coverage and care.
A key component of Indiana’s approach concerns the charging of premiums. Most of those getting coverage because of Medicaid expansion are the working poor — people with low-wage jobs in restaurants, construction, retail stores and more who can’t afford or aren’t offered insurance through their employers. Ample past research shows people barely scraping by must often forego coverage if faced with cost barriers. Also concerning in Indiana’s approach are provisions that lock out people from coverage for six months if they miss premium payments, deny dental and vision coverage for those who don’t pay and eliminate transportation help to the doctor.
It could cost Kentucky more to administer premium payments and the added co-pays that are in the Indiana program than the state would actually collect. That’s because Kentucky would have to set up a complex new system and hire workers to track people’s incomes and payments. Besides the burden of new administrative expenses, reducing the number of people covered can increase costs over time in more expensive emergency room care, because untreated health conditions become worse and as our overall health status declines.
Indiana put in these provisions at the launch of its Medicaid expansion, which means despite its serious flaws, a net increase in health coverage occurred. This is important because in Kentucky’s case changes could mean fewer people covered. The federal government is likely to reject a proposal that leads to coverage losses and an overall structure that makes it harder for people to access care than currently exists.
Good health is a cornerstone of a great state. While Kentucky has long lagged behind other states, the progress we’ve made in the last couple of years is undeniable. We should not go backward when we are just getting started.
Jason Bailey is executive director of the Kentucky Center for Economic Policy, www.kypolicy.org.
Recently released population estimates from the Census show that, over the last five years, Kentucky continues to urbanize. Rural eastern and western counties’ populations have dropped while the “golden triangle” (the region bound by Jefferson, Fayette, and the northern Kentucky counties) as well as the Owensboro-Bowling Green corridor grew. Overall, between 2010 and 2015, Kentucky grew by an estimated 77,155 people or 1.8 percent. Almost all of the state’s net increase in population, 68,810, occurred in cities.
By percent, the counties that saw the largest loss of population were:
- Lee (-12.4 percent)
- Fulton (-8.4 percent)
- Owsley (-6.4 percent)
- Robertson (-5.9 percent)
- Letcher (-5.8 percent)
The counties that saw the largest percent growth were:
- Scott (+10.5 percent)
- Shelby (+7.9 percent)
- Warren (+7.6 percent)
- Oldham+7.4 percent)
- Boone (+7.0 percent)
When looking at the number of people who left counties, Pike and Floyd counties had the greatest decline with 3,158 and 2,178 fewer respectively. Perhaps unsurprisingly, Jefferson and Fayette counties saw the largest growth with 21,395 and 17,771 more people respectively.
The national trend of urbanization is longstanding, but the hastening decline of coal and manufacturing jobs in Kentucky are almost certainly contributing to the decline in some rural counties’ populations. In fact, since the great recession, job gains have concentrated almost exclusively in urban and suburban areas, the same areas that have seen the lion’s share of Kentucky’s population growth.
Kentucky has had great success in reducing the number of people who are uninsured since it expanded Medicaid coverage through the Affordable Care Act. Since that time, Governor Bevin has announced he will seek changes to the program through a federal waiver process. But the word waiver has more than one meaning when it comes to Medicaid, and can mean both positive changes to the program as well as changes that create new barriers to the coverage and care Kentuckians need.
The federal government offers two ways a state can make changes to its Medicaid program: State Plan Amendments (SPA) and Waivers. States can make many administrative changes through a SPA as long as they don’t violate federal Medicaid regulations. However, when a state is seeking to change their Medicaid coverage in a way that would require CMS to waive certain regulations, states must ask for a waiver, which is what Kentucky is currently exploring.
Kentucky’s Medicaid program currently uses two types of waivers to shape how care is delivered: 1915 (b) and 1915 (c). The type of additional waiver Gov. Bevin is seeking is called an 1115 waiver. The numeric titles refer to the section of the Social Security Act where they can be found, and though there are more waivers than are explained here, these represent the most commonly used options. Each waiver has a different purpose and different requirements.
- While there are different iterations of this waiver, the 1915 (b1) waiver is often referred to as the Managed Care waiver. In Kentucky, it has been used to offer Medicaid benefits through five private statewide organizations, rather than state government directly reimbursing healthcare providers for their services to Medicaid beneficiaries.
- This type of waiver must cost no more than a traditional fee-for-service Medicaid structure and cannot restrict access to or quality of healthcare. These waivers are approved for up to five years, but are often renewed.
- Twenty-two states use this kind of waiver.
- Kentucky also uses a 1915 (b4) waiver so that it can provide non-emergency medical transportation through contracts with private transportation companies. This way the state can offer multiple ways of helping people get to doctor’s appointments who would normally have a hard time arranging for transportation.
- These are often referred to as Home and Community-Based Services (HCBS) waivers. Kentucky uses seven different kinds of these waivers in order to allow people to remain in the community who might otherwise need care in institutional settings such as traumatic brain injury patients and those with intellectual or developmental disabilities.
- This waiver must cost no more per-person than traditional nursing home costs would be. They are approved for three year periods, but can be renewed every five years thereafter.
- There are currently 302 such waivers being used by 48 states.
- These waivers are known as demonstration waivers, because they are intended to allow a state to experiment with how best to cover and deliver healthcare for Medicaid and Children’s Health Insurance Program recipients.
- The criteria for approving a state’s demonstration waiver are:
- increase and strengthen overall coverage of low-income individuals in the state;
- increase access to, stabilize and strengthen providers and provider networks available to serve Medicaid and low income populations in the state;
- improve health outcomes for Medicaid and other low-income populations in the state; or
- increase the efficiency and quality of care for Medicaid and other low-income populations through initiatives to transform service delivery networks. Cost saving cannot be the only purpose of the waiver.
- 1115 waivers last for five years, and can be extended for an additional three years. Evaluations of the waiver’s impact are conducted while the waiver is in effect and after the waiver has expired in order to share best practices and determine what shouldn’t be repeated in other states.
- While the current discussion around 1115 waivers has centered around Medicaid expansion, this kind of waiver has been in existence for much longer. In fact, CMS has approved 1115 waivers in 27 states, though most of them pre-date the implementation of the Affordable Care Act.
Medicaid is designed to offer flexible implementation so each state can respond to the unique needs of its people, and so that innovations of healthcare coverage and delivery can be attempted and shared. All 50 states go about offering Medicaid differently, but the common goal of the program is that everyone has access to quality, affordable healthcare when they need it. It will be important to keep that goal at the center of the discussion about pursuing an 1115 waiver for Medicaid in the Commonwealth.
by Greg Stotelmyer