by Ronnie Ellis
In colleges across Kentucky, students are beginning their fall semester — some for the first time, some returning to complete a degree. Here are five things about higher education in our state to keep in mind as the new school year begins.
State budget cuts have continued
Kentucky ranks in the bottom 10 states in the nation for per-student higher education funding cuts since 2008, according to a recently released report. We are also 1 of 13 states that continued to cut over the past school year, while the majority have begun to reinvest. These cuts have caused harm in our state’s public higher education institutions — including faculty and staff layoffs, hiring freezes, some degree and program eliminations and scaled back student services. State budget cuts have also contributed to significant tuition increases that further reduce college affordability.
Tuition has gone up
Tuition has continued to increase this year at Kentucky’s public universities and community colleges — with the exception of the University of Louisville and Kentucky State University, although Kentucky State has submitted a proposal to the Council on Postsecondary Education to raise tuition and fees by five percent.
It is important to keep in mind tuition and fees make up only a portion of the actual costs of attending college (i.e., room and board, books, etc.). National research shows many community college students struggle with food and/or housing insecurity, despite the relative affordability of these schools compared to others.
Financial aid isn’t adequate
Student loan debt in Kentucky has been rising and we rank third worst in the nation for student loan default.
While the 2016-2018 budget included a small increase in funding for the state’s need-based scholarships, the need is much greater than what these additional funds have been able to provide. The scholarship amounts are also small ($1,900 a year for a full-time student receiving a College Access Program grant) and the purchasing power of these scholarships weakens every year as tuition and inflation grow and scholarship amounts do not.
The new Work Ready Kentucky Scholarship is limited only to students enrolled in short-term credential programs (diplomas or certificates for specific trades and skills, not an associate’s degree) in five areas including health care and advanced manufacturing. The scholarship can be used for programs at several of the state’s universities and two private institutions; however, the scholarship just covers the amount of tuition and mandatory fees at a Kentucky community college. Most low-income students will not benefit as the scholarship is only paid out after Pell Grants and other scholarships have been applied to a student’s bill; the scholarship does not help pay for the many additional costs of college beyond tuition and mandatory fees — including books and fees for supplies, which can be quite expensive for some of these programs.
In addition, the Pell Grants so many low-income Kentucky students are relying on to attend college are at risk of deep cuts in the federal budget starting next year.
Performance-based funding begins this year for public universities and community colleges
Performance funding for the state’s public universities and community colleges goes into effect this year. A concern with basing some state funding on institutions’ performance on certain metrics is that low-income, minority and academically underprepared students may be left behind. While the funding model does include specific metrics for degree attainment by low-income and minority students, the model could do more to prevent negative impacts. Institutions may be incentivized to become more restrictive with admissions, among other unintended consequences.
Low-income and minority students most harmed by higher education funding cuts
Performance-based funding is just one way low-income and minority students will especially face challenges from the trends in Kentucky higher education. Low-income students and students of color are less likely to enroll and graduate, especially when costs increase. These students face more financial difficulties — and are more likely to have student loan debt — even when they attend community college and receive Pell Grants. A disproportionate share of homeless community college students surveyed are students of color.
An annual report on higher education cuts across the U.S. shows Kentucky’s continued budget reductions are keeping us among the bottom 10 states when it comes to per-student funding cuts to our public universities and community colleges.
The report, from the Washington, D.C.-based Center on Budget and Policy Priorities, shows Kentucky in the bottom 10 states in cuts since 2008 — a decline of 26.4 percent, or $2,832, per student, once inflation is taken into account. Kentucky is also one of 13 states that continued to cut higher education funding between 2016 and 2017.
The results are alarming, Kentucky Center for Economic Policy Communications Director Kenny Colston said.
“This report shows that as the majority of states are re-investing in their futures by committing to funding higher education, Kentucky continues to move in the wrong direction,” Colston said. “Every cut in state funding puts pressure on students by resulting in rising tuition costs – which prices low-income students out of opportunities and forces thousands of others into unmanageable student loan debt.”
The report directly links cuts in state funding to rising tuition costs and student loan debt across the U.S.
In order to stop Kentucky’s higher education funding slide, lawmakers should clean up the tax code by ending some of the billions of dollars in tax breaks that drain revenue so we have the resources to better invest, Colston said.
“With another budget session upcoming in January, it’s time for lawmakers to make the decision to close tax loopholes that benefit only the wealthy and corporations so we can re-invest that revenue into our communities and our future,” he said.
by Greg Stotelmyer
by Eric King
A new report released today by the Kentucky Public Pension Coalition (KPPC) shows how switching to a 401(k)-type retirement plan (also known as a defined contribution system) will not help Kentucky’s pension funding challenge but make it harder to pay down liabilities while harming the workforce and economy.
Key findings from the report, authored by the Kentucky Center for Economic Policy (KCEP) and the Keystone Research Center of Pennsylvania, include:
- A switch to a defined contribution plan would make it more expensive to pay down existing unfunded liabilities, as shown in studies from 14 different states that have considered such a change. Moving to 401(k)s involves closing the existing defined benefit plans to new members, which requires adopting a more conservative portfolio in the closed plans leading to lower investment returns over time.
- Defined contribution plans would fail to save money on new workers because the employer contributions in the state’s defined benefit plans are already modest, especially after several rounds of benefit cuts in recent years. Defined contribution plans are also far less efficient, costing between 42 and 93 percent more to deliver the same retirement benefit as a defined benefit plan.
- Worsening benefits by switching to 401(k)-style plans would make it harder to attract and retain a skilled workforce, especially since public employees already make less in total compensation than private sector peers.
- Switching would weaken local economies, where Kentucky state and local pension benefits inject $3.4 billion every year.
The downsides of defined contribution plans are why almost no state has adopted them among the many that have considered doing so. One state, West Virginia, moved to a 401(k)-type plan for its teachers in 1991 but reversed course 15 years later because of lower investment returns and a teaching workforce that was woefully unprepared for retirement.
“Far from solving our pension liabilities, switching to a 401(k)-style plan can actually make costs rise while harming workers and communities,” one of the report’s authors, KCEP Executive Director Jason Bailey, said. “We encourage lawmakers to take heed of the findings of other states and experts before heading down that path.”
State lawmakers have repeatedly said they will take up changes to the pension systems as part of a special session later this year. While no plan has been publicly revealed, many have referenced switching to a 401(k)-style plan as part of what is under consideration.
Kim Ludwig, teacher from Bullitt County, said:
“As the report states a defined contribution 401(k) plan is not significantly cheaper for the state because the existing defined benefit plans are very inexpensive as long as they’re properly funded. Payments to the fund would still be necessary, while introducing new costs to fund the defined contribution 401(k) plan.”
The Kentucky Public Pension Coalition is a coalition of organizations representing current and retired state workers, including first responders, teachers and other state workers, as well as allied organizations.
Brian O’Neill, a firefighter from Louisville, said:
“Switching to a 401(k)-style system will have zero benefit for our state. It is not a retirement. All this gloom and doom talk is just a typical Wall Street parlor trick that will move money from the workers who earned it to the hedge fund types that want so badly to get their hands on it. The only way to address the unfunded liability of KRS is for the state legislature to pay their bills and stop falling for the special interest’s 401(k) trap.”
Kentucky needs solutions that work to pay down its unfunded pension liabilities. A new report from the Kentucky Center for Economic Policy and the Keystone Research Center shows shifting state employees to inefficient 401k-type defined contribution plans won’t reduce the liabilities but will make the funding challenge worse while harming the workforce and economy. Highlights from the report are below.
Defined Contribution Plan Will Fail to Save Money Compared to Inexpensive Existing Plan While Introducing New Costs
Regular costs of state pension plans are already low, and plans have been through multiple rounds of cuts.
New Kentucky employees contribute more toward their pensions than does the state, and the low state contribution is comparable to what private sector employers contribute for 401k plans and Social Security. The legislature already cut benefits and required more years of service for retirement eligibility in 2008, ended cost of living adjustments for state worker retirees in 2012 and moved new state and local employees into a hybrid cash balance plan that shifts risk to those workers in 2013.
State studies show new plan designs aren’t cheaper.
Past actuarial analyses of moving Kentucky workers to a defined contribution plan and creating a hybrid plan showed they would be no cheaper for new workers than the existing defined benefit plan.
Defined contribution plans cost more to deliver the same retirement benefit.
Defined contribution plans are less efficient than defined benefit plans because of portfolios less balanced by workers of different ages and the cost of purchasing annuities, among other factors. Experts say it costs between 42 percent and 93 percent more for a defined contribution plan to provide the same level of retirement benefit as a defined benefit plan. An actuary hired by Kentucky in 2015 said it would cost substantially more to shift Kentucky teachers to a defined contribution plan than keep the existing plan.
Switch would make it more expensive to pay down unfunded liabilities.
A switch to defined contribution plans would close the existing pension plans to new members, which would lower investment returns on the existing plans’ assets over time, adding large costs to pay down unfunded liabilities. Studies in 14 states that have considered a switch to defined contribution plans projected that closing a defined benefit plan lowers investment returns and increases the costs of paying down legacy debts.
Switch to Defined Contribution Plan Undermines Ability to Attract Skilled Workforce and Weakens Local Economies
Switch would raise costs by making it harder to attract and retain a skilled workforce.
Kentucky public employees already make less in total compensation than comparable workers do in the private sector, research shows. Especially since governments are large, permanent employers, it makes sense for them to use defined benefit pensions as a tool to compete for qualified workers in lower paying public sector jobs. Workers in positions that provide defined benefit pensions tend to have lower turnover and longer average tenure, meaning lower recruitment, hiring and training costs for employers.
Shift would weaken local economies.
A less secure retirement from inferior 401k-type plans would also harm local economies where pension benefit checks play a major role, and raise public benefit costs as more workers retire into poverty. Pension benefits inject $3.4 billion into the Kentucky economy each year. As those monies are spent at local businesses, they have a multiplier effect that results in the creation of jobs.