Making Workers Pay for Politicians’ Mistakes isn’t the Only Way to Fix Pensions

Four New Ways Kentuckians Could Lose Medicaid

Low-income and disabled Kentuckians are currently eligible for a broad range of health care benefits thanks to Medicaid. As long as people earn below a certain annual wage ($16,670 for adult individuals), or have certain disability-related needs, they qualify. But Kentucky’s recent request to the federal government to make changes to our Medicaid program (known as an 1115 waiver) would add four new ways for people to lose coverage. The documentation attached to the waiver request estimates these new barriers will be a main driver behind 96,687 fewer people being covered by Medicaid.

1. Work Requirements are Ineffective and Unprecedented

The waiver includes a mandatory 20-hour “community engagement” requirement – which is essentially a work requirement. If non-disabled adults who are covered through the expansion and are not primary caregivers don’t volunteer or work 20 hours per week, they can be locked out of Medicaid for 6 months.

Such a requirement is at odds with the goal of the Medicaid program, which is to provide health coverage for those who cannot afford it. A work requirement will result in fewer people covered by Medicaid and has not been shown to be an effective tool for promoting long-term employment or reducing poverty. Evidence from the work requirements in TANF (cash assistance for low-income families) and SNAP (formerly known as food stamps) show that people don’t end up in well-paying, long term jobs or are lifted out of poverty because of their participation in a work requirement.

Although a work requirement has never been approved for any state’s Medicaid program, some states have started to ask for one. For example, a similar request to implement a work requirement in Indiana estimated roughly 30 percent of Medicaid enrollees would be subject to that requirement, and of those, a quarter would lose coverage because they wouldn’t meet the weekly hours required.

2. Premiums are a Barrier to Coverage for Those Already Struggling to Make Ends Meet

Under this same waiver request, Kentucky’s Medicaid program would require people who earn above the poverty line ($12,080 for an individual) to pay premiums that increase over time, topping out at $37.50 per month, or else lose coverage. People who earn below the poverty line also must pay either premiums that increase in tiers tied to income levels, or co-pays, which can be an impediment to getting needed care and become very expensive for people with health conditions. Only people deemed “medically frail,” children and pregnant women would not be subject to premiums.

Oregon, Utah, Washington and Wisconsin have tried charging premiums for Medicaid enrollees in the past. In each of these states, premiums resulted in enrollment decreases due to being an added barrier to coverage that people barely making ends meet could not manage. In Oregon, enrollment dropped by almost half when they began charging premiums for Medicaid.

Using Indiana’s mandatory monthly contribution outcomes as a proxy, we could expect over half of Medicaid enrollees in Kentucky to miss a payment, with some being locked out of coverage for six months and others being forced to make expensive co-pays every time they go to see a doctor. In Indiana, tens of thousands either lost coverage or were never covered because they missed a payment.

3. Reporting Requirement Penalty is Extreme Given the Nature of Many Low-Wage Jobs

Another way Medicaid enrollees could lose coverage for 6 months is if they fail to report relevant changes in income or work hours within a 10-day window. This mandate means any changes to hours or income that relate to the work requirement or premium tiers must be reported quickly and often.

This provision is especially problematic for Medicaid enrollees due to the kinds of jobs they have. Most Medicaid expansion-eligible adults work, but work in jobs with notoriously variable hours and inconsistent incomes like in restaurants, construction and retail. For example, “just-in-time scheduling” that can result in people being called into work the day-of or sent home after reporting for a shift, tip-dependent server jobs and weather-dependent construction work are all examples of low wage work that varies from week to week. Penalizing someone’s failure to report those changes with a six-month disenrollment is both unduly harsh and in no way reflects the kinds of health coverage others receive.

4. Annual Re-determination is Unnecessary and Disconnected from Other Types of Coverage

With the exception of pregnant women, children and the “medically frail” enrollees will have to fill out redetermination paperwork each year within a three-month window, starting nine months after their coverage begins. If an enrollee misses that window they lose coverage and have to wait nine months before they can start receiving benefits again.

Currently, as long as an enrollee’s circumstances have not changed they are re-enrolled automatically, like most anyone who gets insurance through work or who decides to keep an policy they purchased directly from an insurance company. This requirement adds a new, unnecessary hurdle for people to keep Medicaid coverage once they have it.

There are ways Medicaid enrollees can re-enroll prior to the end of their six-month lock out period if they lost coverage due to a work requirement, premium or reporting requirement violation. But nearly 100,000 Kentuckians will still lose coverage, in large part due to these new barriers. Medicaid waivers are meant to demonstrate innovation in providing health coverage for more low-income people, creating efficiencies in the delivery of care, strengthening the relationship between the state and health care providers and improving health. Building new ways for people to lose coverage falls far short of these goals.

Clawback of Cost of Living Adjustments Would Be Major Hit to Retiree Checks

The Bevin administration’s consultant recommends a massive cut to many retirees’ incomes by rolling back past cost of living adjustments (COLAs) — a proposal that could reduce pension checks by as much as 32 percent.

The plan in PFM’s report would claw back COLAs earned between 1996 and 2012 for those receiving pensions in all of the plans, including state and local workers, teachers and police.  For Kentucky Retirement Systems (KRS) retirees, that means their checks could be as much as 32 percent smaller for those who retired before 1996 and earned all of the COLAs, as the estimates in the graph below show. Hardest hit are the oldest retirees who have the fewest options to replace their lost income.

The cut would be a steep loss to retirees across the Commonwealth. To get a sense of the scale, PFM estimates a $355.5 million reduction in employer contributions to the retirement systems because of the rollback in 2019, $201.3 million of which would come from the teachers’ plan.

Rather than looking at sensible revenue options, the report suggests Kentucky should break promises to retirees and make cuts that dramatically reduce their standard of living.

What are Key Players Saying About a Consultant’s Proposals to Fix the Pension Crisis?

PFM Report Uses Exaggerated Claims to Justify Harsh, Counterproductive Cuts

The final report from the state’s pension consultant PFM uses exaggerated claims about the condition of all of the state’s pension plans to justify harsh and ultimately counterproductive cuts to retirees, current workers and future employees.

PFM bases its recommendations on claims that existing actuarial assumptions must be altered immediately and dramatically for all of the state’s pension plans. Those changes add $1.8 billion to employer contributions in 2019 above what they would otherwise be.  But while the depleted state of the Kentucky Employees Retirement System (KERS) non-hazardous plan merits additional contributions beyond what its prior assumptions required, PFM applies very conservative assumptions to all of the state’s plans to get to that number — even those plans that are in much better condition.

For example, PFM recommends lower investment return assumptions and a so-called “level dollar” approach to paying down liabilities for the Teachers’ Retirement System (TRS), even though unlike KERS non-hazardous, TRS is 55 percent funded with $17 billion in assets and a payroll that is growing. That change to TRS makes up 47 percent, or $862 million, of the $1.8 billion in added cost PFM claims is necessary, as the graph below shows.

The level dollar approach says the state should be contributing the same dollar amount to TRS now that it will 30 years from now, even though inflation, the economy and population will continue growing between now and then (the latter is why most all pension systems use a level percent of pay method, which allocates costs more evenly as a share of expenses, rather than a level dollar approach that requires sharply higher up-front payments).

Overstated claims from PFM about what must be contributed set the stage for major benefit reductions. Here are some of the ways PFM’s proposals would harm different groups of workers.

Retirees

PFM recommends clawing back cost of living adjustments (COLAs) given to retirees in all of the plans (including state and local workers, teachers and police) between the years 1996 and 2012. The consultant states that members “who retired in 2001 or prior could have their benefit rolled back 25 percent or more if past COLAs were completely eliminated from prospective benefit payments for retirees.” This cut is one of the report’s biggest, and would severely reduce the quality of life for many retirees — especially those who are older.

Also, PFM would end future pension benefit COLAs for retired teachers (including current teachers after they retire) until the plan is 90 percent funded (which would be far in the future — PFM projects the TRS plan will be 84 percent funded in 2034.) Teachers currently receive a COLA of just 1.5 percent, in part because they do not participate in Social Security, which has COLAs. Kentucky retired teachers would be among the few Americans without a defined benefit plan that adjusts for the cost of living.

Current Workers

The report calls for freezing current workers’ pension benefits and moving them to inferior 401k-type defined contribution (DC) plans for the remainder of their careers. PFM also proposes a buyout to encourage moving workers fully to DC plans. Employees in the KRS cash balance plan created in 2013 would have their credits in this hybrid plan transferred to DC account balances.

PFM would move the goalposts for current workers to receive what remains of their defined benefit plans by raising the retirement age for unreduced benefits to age 65 for non-hazardous workers and teachers and to 60 for hazardous duty employees like firefighters and police officers. The state’s consultant would also eliminate provisions for current teachers including use of sick time towards service credit, a higher factor to calculate benefits for those with over 30 years of service and a method of using the highest 3 years of salary for those over age 55 with 27 years of service.

Cuts to current workers raise serious questions about legality, as they do for retirees, and big problems with how current workers will respond, including the threat that many will choose to retire before changes go into effect — causing a drain on the retirement systems and a workforce crisis for the state and school systems.

New Employees

For new employees, PFM would move everyone into inefficient 401k-type DC plans. As we show in our recent report, such a move will dramatically reduce the benefits new workers receive for a cost that is comparable to the existing defined benefit plans. Workers in DC plans receive benefits 30 to 48 percent smaller for the same upfront cost.

PFM even recommends moving new teachers into DC plans and Social Security. That will increase costs for employers, as PFM itself admits on page 16 of its report. The current employer cost of the pension plan for teachers is 5.84 percent of pay. Social Security will cost 6.2 percent of pay, on top of which employers will make a match to a DC account of up to 5 percent of pay under PFM’s proposal. So for more employer cost, teachers will get a much smaller benefit. PFM justifies this in part by saying school boards should pick up the cost of Social Security, not the state, continuing the trend of shifting the cost of education from the state to the local level.

In making these changes, PFM ignores the added costs associated with closing the existing plans and moving to 401ks. Closed plans are no longer balanced by workers of different ages, forcing plans to take on more conservative investment portfolios. That will lower rates of return, making it more expensive to pay down existing liabilities over the coming decades. As we review here, 14 states have considered such a switch and found that closing plans and moving to 401k-type DC plans increase the costs of paying down legacy debts.

On top of the pension benefit cuts above, PFM also recommends cutting retiree medical benefits by 25 percent.

As a whole, PFM’s recommendations are a drastic and one-sided approach to addressing the state’s pension liabilities. They put the blame and responsibility entirely on retirees, current employees and future workers. Nowhere in the report does PFM look at revenue options that would help Kentucky pay down its liabilities over time while protecting the remainder of our budget and safeguarding our ability to attract a skilled workforce.

 

 

Op-Ed: Pension Session Without New Revenues Won’t Fix Problem

This column originally ran in the Courier-Journal on Aug. 25, 2017.

In January, Gov. Bevin announced he would call a special session this year on pensions and tax reform. At the time, he said the issues must go together and rightly asserted tax changes could not be “revenue neutral” — meaning they must generate new dollars to meet our ongoing obligations.

In recent interviews, however, the governor has seemingly backed away from presenting a plan to raise revenue for a legislative session on pensions, calling tax reform a “totally separate issue.” But holding a special session on pensions without putting new money on the table would fail to address the problem we now face — and potentially make it even worse.

We’ve tried the pension reform “cure“ before with legislation overhauling and cutting future benefits, even as recently as 2008 and 2013. Those alterations didn’t make a dent in the unfunded pension liability — a problem from the past that cannot be resolved on the backs of those moving forward.

As the state’s consultant has shown, 76 percent of the unfunded liability in the state’s most depleted plan (the Kentucky Employees Retirement System non-hazardous plan) is for already retired or inactive members and 24 percent is for current workers on their way to retirement. In both cases, the commonwealth has a legal and moral duty to protect those benefits. Workers and retirees made life decisions expecting their already-modest benefits to be there, and we cannot go back on our word.

At the same time, new workers do not increase the unfunded liability — which by definition refers to benefits earned in prior years.  However, new employees have been the focus of previous rounds of cuts because their benefits are easily changed under law — and because future workers don’t exist yet to put up a fight.  Changing the structure of benefits again for new employees may actually add costs instead of reducing them.

For example, closing the current pension systems for new workers and switching to 401k-type defined contribution plans will make it much more expensive to pay down the existing plans’ liabilities. That’s because the portfolios in those plans will no longer be balanced by workers of different ages, requiring a shift to more conservative investments. That will reduce returns, resulting in substantially bigger state contributions to pay the liabilities off.

What’s more, the major problem facing the precarious KERS non-hazardous plan is a need for extra cash now and over the next few budgets. If the plan is closed to new participants, dollars contributed from and on behalf of new workers will no longer go into it, tightening cash flow further and putting the plan at greater risk.

A switch to 401ks for new workers will not even save money far down the road because the cost of Kentucky’s existing plans are already modest, and are on par with contributions made by private employers to 401ks and Social Security for their employees. It’s difficult to save money from defined contribution plans because they are a far less efficient way to provide retirement income. They deliver benefits 30 to 48 percent smaller for the same amount of up-front payments as defined benefit plans. That’s due to lower investment returns and the extra cost of annuities workers would need for the same protection from running out of money in retirement.

Inferior 401ks also lead to difficulties in attracting a skilled workforce, since defined benefit plans are recruitment tools that encourage qualified workers to choose lower-paid government employment. The result is higher turnover and more spending on training. And a revolving door workforce leads to lower quality public services. Reduced benefits will mean more workers retiring into poverty, harming local economies where Kentucky public pension benefits inject $3.4 billion every year.

For a variety of reasons, Kentucky faces the most challenging fiscal picture in recent memory going into the next budget session. More pain is around the corner unless we take the smart route of generating new revenue.

Another overhaul of future pension benefits is a distraction from the urgent need to deal with what’s right in front of us.

 

 

Pell Grant Cuts Would Reduce College Access and Economic Opportunity in Kentucky

The recent U.S. House budget resolution would slash the Pell Grant program by $75 billion over the next decade, cutting the maximum grant by $1,060 or 18 percent. Pell Grants help expand college access and economic opportunity in Kentucky, and cuts to the program would be incredibly harmful.

Pell Increases College Access in Kentucky

Pell provides need-based grants to undergraduate students who haven’t yet earned a bachelor’s degree; unlike loans, students don’t need to repay them. For the 2017-2018 school year the maximum amount for a Pell Grant is $5,920.

Last year 102,360 students in Kentucky received a Pell Grant and the state’s postsecondary institutions received $372,576,000 from Pell. You can see the breakdown by Congressional District here.

The table below shows the share of students at the state’s public universities and community colleges that receive Pell Grants.

Pell Students Are Low-Income, Often Nontraditional Students

As noted in a recent report, “Pell Grants play a critical role in expanding postsecondary opportunity for non-traditional and historically underserved populations, including older students and students who are parents.”

Pell recipients are by definition relatively low-income. More than half of all Pell Grant recipients had family incomes below $20,000; 70 percent were below $30,000. Pell grants are largely based on a student’s Expected Family Contribution, which is determined by a family’s income, assets, size, the number of family members in school, whether the student is a dependent or independent, and whether the student has dependents. The largest awards go to the lowest-income students.

Pell students are also more likely to be older, a member of a racial or ethnic minority group, financially independent and a first generation college student. In addition, nearly 4 in 10 veterans attending college (38 percent) receive Pell.

Pell Works

Research indicates Pell not only broadens access to college, it also helps students be more successful —by reducing drop-out rates and increasing academic success. A $1,000 increase in Pell has been shown to reduce the likelihood of a student withdrawing by 6 to 9 percentage points and to increase lower-income students’ chances of getting a bachelor’s degree within 6 years by 3 percent. Pell is also associated with other measures of success such as transferring to a four-year institution or getting an associate’s degree or certificate.

Pell Grants Are Already Modest

Pell currently covers just 29 percent of the average costs of tuition, fees, room and board at public 4-year colleges — its lowest level in more than 40 years. In 1975, a Pell grant covered 79 percent of these costs. Cuts to Pell in the federal budget would mean further erosion of the grant’s purchasing power, especially given tuition at Kentucky’s public universities and community colleges keeps going up.

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