About That 3 Percent ‘Pay Cut’ in Pension Plan? Teachers, Workers Say They’re Stumped.

How Developers of Lexington’s Flashiest Mall Got a Tax Break Meant for Blighted Areas

Congressional Plan to Cut Taxes Now and Programs Later Would Harm Kentuckians

Now that the Senate and House have both passed budget plans that include a fast-track process for tax cuts, Congress is poised to launch the first step of a likely two-step tax and budget agenda. Step one is enacting tax cuts heavily skewed toward wealthy households and profitable corporations. Step two is paying for them later through program cuts that will deeply harm low- and middle-income Kentuckians.

Instead of trying to pass a single bill with both tax cuts and offsetting program cuts, the two-step strategy is an effort to distance the windfall for those at the top from the harm to low- and middle-income Americans. The tax cuts being discussed could increase the deficit by $1.5 trillion over the next decade, with a true cost that is likely even higher including because tax cuts do not pay for themselves. Eventually, the very same authors of expensive tax giveaways to the wealthy likely will point to investments in the safety net and middle class as the cause for the growing deficit and submit plans for deep entitlement and other spending cuts.

Blueprints for these cuts already exist in budget proposals laid out by the House, Senate and Trump Administration. Most Kentuckians would lose more from cuts to programs that support economic security and promote economic opportunity than they would gain from tax cuts slated toward millionaires. Here are some of the expected impacts of program cuts.

Increased Homelessness and Hardship

Rental assistance for vulnerable families is a likely target for cuts. The Senate and House plans both proposed cuts to Non-Defense Discretionary (NDD) funding and while neither specifies where the cuts would come from, the President’s budget hits housing assistance hard. In Kentucky, 153,584 people (76,039 households) receive assistance through Housing and Urban Development (HUD) rental assistance programs.

Elderly Kentuckians Worse Off

The budget proposals from President Trump and the House and Senate would cut health care and basic assistance for millions of low- and moderate-income seniors. All three budget plans call for cutting Medicaid – a primary source of funding for nursing home care for Kentuckians among other needs – and subsidies to purchase coverage through a health care exchange; and the House and Senate propose cutting Medicare by nearly $500 billion over 10 years. At-risk NDD funds for programs like housing assistance are an important support for elderly Kentuckians, as is federal food assistance which is also at risk (discussed below); 25 percent of Kentuckians receiving food assistance are elderly or disabled.

Kentuckians with Disabilities Hurt

Programs that provide critical support for Kentuckians with disabilities are also likely targets for cuts, with the administration and congressional leaders already pointing to existing projected deficits to justify cuts. These programs include: NDD spending including housing assistance, Medicaid, Social Security Disability Insurance (SSDI), Medicare, food assistance, and Social Security Income (SSI provides income support for very poor individuals who are disabled or elderly). Representing just a portion of Kentuckians with disabilities who rely on these programs, there were 180,613 Kentuckians receiving SSI benefits and 203,471 receiving SSDI in December 2016.

Shrinking Investments in Students and Schools

Once a tax bill is passed and deficits grow, it will likely be argued that cuts to education are needed — especially since the House and Trump budget specifically propose NDD funding cuts to K-12 education. NDD funds in Kentucky support the two main federal grant programs for local schools (Individuals with Disabilities Education Act and Title I), Head Start, School Improvement Grants and adult education. In addition, financial aid for college students such as Pell Grants (part of Pell funding is NDD) is a potential target for cuts; 102,360 student in Kentucky received a Pell Grant last year.

Threats to Food Assistance

The Supplemental Nutrition Assistance Program (SNAP) is also at risk for cuts. The House and Trump budget plans include at least $140 billion in cuts to SNAP over 10 years — and while the Senate doesn’t lay out specific programs cuts, the parameters it does outline could necessitate SNAP cuts similar to the other two budget proposals. In February 2017, 651,889 Kentuckians (308,453 households) were receiving SNAP with an average benefit per person, per meal of $1.36.

Most Kentucky Children Would Be Worse Off

When the bill on tax cuts comes due, many programs that provide support to Kentucky children could be cut. These include Medicaid, SSI, SNAP, tax credits for working families and other key investments such as education funding and housing, as discussed above; 41 percent of Kentucky’s SNAP recipients are under the age of 18.

Click here for fact sheets on how some of these critical investments help Kentuckians and here for how NDD funding is important to our state.

Would Federal Tax Proposal on 401(k)s Undercut Bevin’s Plan?

Additional Contribution for Retiree Health Benefits Is an Unnecessary Wage Cut

The state’s proposed framework for pension legislation would require public employees to pay three percent more of their salaries toward retiree health benefits, the effect of which is the same as a three percent cut in wages. However, Kentucky’s retiree health plans are much better funded than most similar plans around the country, and the resources available for the plans are growing rapidly without the need for extra contributions from public employees who are already undercompensated.

The new contribution will cut wages by approximately $158 million annually for state workers (including teachers) and another $85 million for local workers — and many of these employees have not received raises for much of the last decade. For a teacher who spends 27 years in the classroom at present-day salaries, the 3 percent contribution would mean the loss of about $40,000 in lifetime income.

Kentucky’s retiree health plans are already far better funded than most around the nation

Kentucky’s retiree health plans are in much better condition than most similar plans across the country. Combined, the Kentucky Retirement Systems (KRS) and Teachers’ Retirement System (TRS) retiree health plans have 47.9 percent of the assets they need to pay future benefits. Several of Kentucky’s plans are actually overfunded, with the Kentucky Employees Retirement System (KERS) hazardous retiree health plan holding 125 percent of the assets it needs, the legislators’ plan holding 127 percent and the judicial plan holding 105 percent.

In contrast, the Center for Retirement Research reports state and local retiree health plans across the U.S. are only 7 percent funded in the aggregate. And as the state’s consultant PFM noted, Standard and Poor’s recently reported that the median funded ratio for state retiree health plans in 2015 is actually zero percent, because most states have not been pre-funding this obligation. Kentucky has been far more aggressive than most other states in putting monies into its retiree health plans.

Historically, most state and local governments funded retiree health benefits on a pay-as-you-go basis. Kentucky began more deliberately pre-funding its retiree health plans in the last decade, after new accounting rules went into effect that put the unfunded liabilities for these plans on states’ balance sheets. Both the KRS and TRS retiree health plans have experienced rapid growth in their funded ratios since then, as shown in the examples below, and are well on their way to full funding.

Most states are continuing to operate their retiree health plans on a pay-as-you-go basis, even with the new accounting rules, for a few reasons. First, states are often able to modify these benefits if needed without significant legal barriers as typically exist for pensions. Second, the future of health care is very uncertain, making projections about how much to pre-fund benefits a guessing game. The assumptions actuaries make about the rate of future health care cost growth are unsustainably high for the country’s economy, making it likely big steps will have to be taken to change the nation’s health care system at some point. And there is controversy about whether the current generation should pay for the transition to fully funding past retiree health benefits given states’ other priorities. Kentucky has taken the more conservative route by aggressively pre-funding retiree health benefits; the proposal to further increase funding for these plans by asking employees to chip in three percent more is even more questionable in this context.

Kentucky has already cut retiree health benefits and taken actions to make them sound

The proposed three percent additional contribution for retiree health benefits comes despite the fact Kentucky has already taken actions to shore up these plans, and despite the fact PFM did not recommend the added contributions — in fact, their reports only discuss retiree health benefits on a handful of pages.

Actions taken to strengthen the plans include a law passed by the General Assembly in 2010 requiring teachers to contribute 3.75 percent of their pay toward retiree health benefits with local school boards kicking in an additional 3 percent. The law also required under-65 teacher retirees to pay an amount toward their premium equal to the Medicare Part B premium (currently $134 a month) in addition to paying the same premium current employees pay toward their health coverage.

The state also cut health benefits for KRS retirees hired after 2003. For those retirees, the system only provides a set subsidy to help them pay for premiums rather than a guaranteed payment of the full amount of the premium. The subsidy is $12.99 per month for each year of service for non-hazardous employees, and it grows by just 1.5 percent a year — or substantially below the usual health cost inflation rate. KRS employees hired after 2008 are also required to contribute one percent of their pay toward an account for health benefits in the pension fund.

In addition, the state has increased other out of pocket costs for public retirees’ health care and then extracted the surplus dollars for budgetary needs. The subsidies for teachers and other public retirees are used to purchase insurance for those under the age of 65 through the Kentucky Employees Health Plan, the same plan available to current workers. The state has raided that plan of resources in recent years, including a transfer of $500 million from the Kentucky State Employee’s Health Insurance Trust Fund to the state’s General Fund to help shore up the current two-year budget and put money in a so-called pension permanent fund. The surplus monies accumulated in the health fund because the state shifted more costs to workers and retirees, including through higher deductibles and co-insurance.

Cutting wages just way to ease state’s burden

Why is a substantial wage cut to pay for benefits that are already on solid footing part of this plan? In the language of the proposed bill we find these additional monies will not go to improving the retiree health funds at all. The bill uses the additional contributions to reduce what the state will need to contribute for pensions in the case of TRS and what the employer will have to contribute for retiree healthcare in the case of KRS.

Here’s how that works. With TRS, the school boards will no longer contribute their current three percent of teachers’ pay for retiree health care, and will instead be required to send that money to the pension plan. That will then reduce what the state would have to otherwise contribute for pensions. And the additional employee contributions for KRS retiree health will reduce what the employer would otherwise have to put into insurance funds, as calculated each year by the system’s actuary.

The proposed three percent employee contribution is another way in which workers are being asked to bear the burden of the state’s obligations without consideration of other options — like cleaning up Kentucky’s plentiful tax breaks to generate the revenues to meet them.

Updated October 29, 2017 to reflect language in proposed bill.

Supplemental Security Income is the “Assistance of Last Resort” for Kentucky’s Most Vulnerable

Supplemental Security Income (SSI), similar to Social Security Disability Insurance, provides a vital lifeline to blind, disabled and aged Kentuckians. Being a means-tested program, however, SSI is specifically designed for those with extremely little means. Far from some claims it is an ever-expanding program designed to create dependency, it is targeted to offer a small but critical benefit only to those who have nowhere else to turn, and encourages work among those who can. Because of the dangerously fragile position these beneficiaries are in, the Social Security Administration refers to this program as the “assistance of last resort.”

Few Qualify for SSI

Kentuckians of any age are eligible to apply for SSI as long as they have very little income and next to no assets, and are either blind or have a diagnosed and significant disability. Additionally, individuals age 65 and older can receive this assistance if they too have very little income and assets.

Specifically, the asset limit is $2,000 for an individual and $3,000 for a couple. Assets include more than just savings, but things like land, life insurance policies, retirement accounts or more than one vehicle per family. These limits have been frozen since 1989, and if they were indexed to inflation would be nearly twice their current amount. The income limit is more variable, but is capped near the poverty level and depends largely on the particular circumstance of the applicant.

Although a larger share of Kentuckians have SSI than other states, it is harder to get benefits in Kentucky than in the rest of the country.

  • In 2015, Kentucky’s award rate was 32 percent of applications, compared to 35 percent for the U.S. as a whole.
  • The award rate for those 18 to 64 years old was even lower, at 29 percent – meaning Kentucky was more stringent for working-aged adults than children or seniors.

SSI Benefits are Modest but Important

The average SSI monthly benefit in Kentucky was just $550 in December 2016, which is an annualized amount of just $6,600 – 55 percent of the poverty level for an individual. But even this meager benefit is crucial, especially for disabled individuals and families with disabled children. That small amount of extra income allows families to provide highly specialized care for their loved ones with a disability or those who are aging and impoverished. On average, disabled children and adults receive more income through SSI than those over age 65.

SSI Encourages Work Among Those Who Can

Through the way SSI benefits are set, beneficiaries are encouraged to work, if they can. Income limits are set by looking separately at unearned income (social security, child support or interest payments) and earned income (wages from a job). The first $20 a month of unearned income and the first $65 a month of earned income are disregarded. Then, SSI benefits are reduced dollar for dollar of unearned income and 50 cents per dollar of earned income. The extra discount for wages encourages people to return to the workforce without facing an immediate end to benefits. SSI also has special rules for young people with disabilities that encourage them to work.

Claims that people stop working so they can get SSI benefits are unfounded. SSI enrollment has not driven changes in labor force participation, as the graph below shows. Changes in the labor force are the result of broader economic conditions that have meant a scarcity of jobs over the last decade, a trend of older workers being employed longer because they cannot afford retirement and a lack of employment opportunities for younger workers.

Economic Changes Drove SSI Enrollment Growth, Which is Now Shrinking

Concerns about Kentucky’s growth in SSI enrollment ignore basic demographic and economic realities, and the fact that SSI enrollment has been shrinking for years now. At 18.5 percent of people living below the poverty level, Kentucky is the 4th poorest state in the country. Kentucky is also the state with the second highest share of the population who have a disability that impedes every day activities. Because of this, a particularly large share of Kentuckians qualify for SSI.

But the share of Kentucky’s population with a disability or seniors without a disability who have SSI is not far from national averages:

  • 23 percent of Kentuckians with a disability receive SSI under a “blind or disabled” determination, which is 4 percentage points higher than the average, but 10 percentage points below the highest share (Washington, DC).
  • 2.4 percent of Kentuckians over 65 without a disability receive SSI under the “aged” category of eligibility, which is the same as the national average and 8 percentage points below the largest share (California).

Enrollment levels in SSI are closely related to changes in the economy. Because the eligibility criteria are tied to not only disability status or age, but also income and assets, the Great Recession caused more people to become eligible as incomes fell and assets were depleted. But as Kentucky’s economy, and therefore wages and financial stability, slowly improved in recent years, the number of Kentuckians with SSI has fallen – just as the program was designed. In fact, the number of Kentuckians with SSI has decreased each year since 2011, and there are now fewer SSI recipients than there have been in 11 years.

Kentucky Pension Reform: Will Plan Make it Harder to Attract Teachers?

State Can Mitigate Pension Problem by Paying What it Promised

Kentucky Awards $5 million a Month to Low-Budget Films. What Do We Get in Return?

States’ Answer to Rising Health-Care Costs for Employees? You Pay for It.