Kentucky Taxpayers Should Question GOP Pension Plan. Here’s Why.

Bevin Says Kentucky Pension Reform Plan Will Make 2018 Budget Session ‘Brutally Difficult’

Film Industry Tax Credits are Growing Rapidly and Pose a Significant Threat to State Revenues

In a recent important article, the Lexington Herald-Leader examined the proliferation of Kentucky’s film industry tax credits. The state’s law allowing the credits was amended in 2015 to reduce the minimum investment required, and to provide enhanced credits for productions that meet those requirements. At that time, we wrote about the dangers of expanding the program as legislators proposed.

The Herald-Leader article noted the state has awarded $90 million in tax credits from the time the program launched through June 30, 2017.  Of that total, just under $2 million happened before the expansion in 2015. Since June 30, the program has continued to mushroom with an additional 57 projects approved for credits of $57.7 million.  At this rate of growth, it is not unreasonable to expect that cumulative approvals since the 2015 expansion went into effect could exceed $200 million by the end of the year.

Project approvals have grown rapidly since 2015:

  • 2015 – 15 projects approved for a total of $4.3 million in credits.
  • 2016 – 55 projects approved for a total of $48.7 million in credits.
  • 2017 through October – 126 projects for a total of $90.6 million dollars.
  • Total 2015 – October 2017 – 196 projects with $143.6 million in credits granted.

There is no cap on the credits that may be approved under this program, and the credits are refundable, which means the Commonwealth of Kentucky cuts a check to the recipient in the amount of the credit that surpasses the recipient’s state tax liability. If this program continues to grow unchecked at its current rate, approvals could well exceed $400 million by the end of 2018 with no hard evidence that the foregone tax dollars have created permanent jobs, permanent infrastructure, or provided a positive return on investment. In fact, the vast majority of research on film industry tax credit programs has found that states receive a very poor return on investment. Since the peak, when 44 states offered film industry tax credits, seven states have ended their programs and several others have scaled their programs back by establishing caps, reducing benefits or limiting the applicability of the program.

The rapid and unchecked growth of this program since 2015 further threatens the scarce resources available to address our structural deficit and unfunded pension liabilities and to invest in the things that make our communities places where we all want to live and work. It is one of the tax breaks Kentucky should end so we have more resources to fund our priorities.

Pension Reform Plan Calls for Current Benefit Caps After 27 Years, 401(k)-Style Accounts for Most Future Public Workers in Kentucky

Kentucky Pension Crisis: Bevin Plan Would Move Workers to 401(k)-Like Plans

Pension Framework Makes Harsh Benefit Cuts, Adds Costs Without New Revenue

The governor and legislative leaders released a framework today that makes substantial cuts to pension benefits for current workers, new employees and even retired teachers. It includes a shift to a 401k-type defined contribution (DC) system for future employees that is no cheaper than the current pension plan but will reduce retirement security and make it harder to attract and retain a skilled workforce. In addition, the framework calls for big new contributions to the plans without any new tax revenue to make that possible.

Major aspects of the proposal include the following:

Framework cuts benefits for current employees and all teachers

The plan reduces benefits for current non-hazardous workers and teachers by ending their participation in the defined benefit (DB) plan after they reach the years of service for full retirement, or 27 years in most plans. After that point, a still-employed worker would move to a DC plan. This change means a significant cut in benefits for long-serving employees. Among current retirees in the KERS non-hazardous plan, 19 percent put in more than 30 years and 27 percent of teachers retiring in the last decade put in more than 30 years. A DC plan started after an employee’s 27th year would be of little value by the time he or she retired, since there would not be enough time for investment earnings to compound.

For current teachers, the framework would eliminate rules after 2023 for calculating benefits based on final 3 years of salary rather than 5 for those working more than 30 years and that allow use of accumulated sick leave toward the final salary computation.

Although today’s press conference indicated that retirees are protected from cuts, in fact the plan suspends cost of living adjustments (COLAs) for retired teacher pension benefits for 5 years (teachers receive a COLA of 1.5 percent per year in recognition that they are not in Social Security, which has a COLA). That amounts to a 7.2 percent cumulative cut in pension checks from what retirees would otherwise receive. Also, teachers in the future will not receive COLAs until they are retired for five years.

In addition, all current and future employees (including teachers) would be required to contribute three percent more of their salary toward retiree health benefits, amounting to a three percent wage cut.

Framework shifts to 401ks with costs similar to current pension plans but inferior benefits

The framework also moves new state and local employees and teachers (with the exception of hazardous duty employees) into DC plans. It converts non-hazardous employees hired since 2013 to DC.

The shift of new teachers into a DC plan will happen without also moving them into Social Security. Under the proposal, teachers would increase their pension contribution from 9.105 percent of pay currently to as much as 12 percent (9 percent required) toward their DC plan. The state would reduce its contribution from 5.84 percent under the current DB plan to only 4 percent toward the DC plan, and would require school districts to pick up 2 percent of pay.

For roughly the same amount of upfront cost from the employer, teachers would receive a significantly inferior benefit. As the graph below shows, it costs between 42 and 93 percent more to provide the same benefit through a DC plan as through a DB plan. DC plans earn lower investment returns and do not provide workers protection against running out of money before they die. Future Kentucky teachers will be among the few Americans without the security of any kind of DB benefit (since Social Security is a type of DB plan). The framework does not provide details on the DC plan for non-hazardous employees, but the current cash balance plan for those workers is slightly less expensive than the DC design the consultant PFM proposed.

Plan calls for major new contributions but offers no tax revenue to make those payments

The framework also includes shifting to a so-called level dollar method of funding pension liabilities. This change will massively front-load costs of paying down benefits, adding substantial new burdens to budgets over the next 10 years or so while asking relatively little of budgets further down the road. PFM put the state General Fund price tag for that change at $1 billion in 2019. The framework makes no mention of lessening that burden on the next budget. The governor described a possible four-year phase-in of level dollar contributions in the press conference, but that may be only for local governments.

Regardless of when that new contribution kicks in, the state does not have the extra resources to make the additional payment. There is no actuarial analysis yet of any immediate cost reductions from the proposed framework, but they can only come from the cuts to retirees and current employees mentioned above (since the proposed benefit for new employees is no cheaper than their current plan). Those changes to current workers and retirees break promises and are of highly questionable legality.

There will also be added costs in the future associated with shutting down the DB plans. Closed plans are no longer balanced by workers of different ages, and so must invest more conservatively. That will lead to lower returns over the many decades it will take until the last check in the closed DB plan goes out.

And the framework includes nothing that generates new tax revenue, meaning any new contributions to the systems now and in the future will have to come from cuts to the rest of the budget. The governor has already called for contingency plans of 17.4 percent cuts to many agencies and programs in 2018, and we are likely to see major new cuts in the next 2-year budget if a framework like this moves forward without new resources on the table.


Federal Tax Reform Plans Will Help the Wealthy, Lead to Program Cuts and Deepen Poverty

This column originally ran in the Courier-Journal on Oct. 17, 2017

On the heels of repeated failed attempts to pay for huge tax cuts for the wealthy by cutting health coverage for hundreds of thousands of low-income Kentuckians and millions of Americans, the Trump administration and Congress are working to pass the same kind of “Robin-hood-in-reverse” tax reform later this fall.

Despite rhetoric describing various possible tax plans as pro-worker and supportive of America’s middle class – Paul Ryan’s Better Way, President Trump’s plan released in April, the Big Six’s “Unified Framework” and language in both congressional budget resolutions – these plans have in a common a mindboggling and very expensive preference for the wealthiest Americans and largest corporations.

The plans overall would massively redistribute wealth upward, lead to cuts in programs that support millions of low- and middle-income Americans and deepen poverty and inequality.

For instance, the current version of the Senate budget resolution – which is scheduled for a vote later this month – would pave the way for $1.5 trillion in deficit-increasing tax cuts over the next decade and trillions more as long as they are offset by slashing funding for programs like Medicaid, Medicare and Social Security. Tax cuts in the “Unified Framework” released alongside the Senate budget resolution would cost $2.4 trillion over the next decade according to the nonpartisan Tax Policy Center.

An analysis of the framework by the Institute on Taxation and Economic Policy found that the average tax cut for the bottom 60 percent of Kentucky households – the three out of five of us who will make less than $56,500 in 2018 – would be $210. The 0.4 percent of Kentuckians who make more than $1 million, on the other hand, would get a 485 times larger tax cut of $96,200.

Some Kentuckians will even face a tax increase, especially upper-middle income households. Which is to say the plan doesn’t just forsake low- to middle-income Kentuckians, but anyone who is not uber-wealthy. According to the Tax Policy Center, in 10 years, the top 1 percent would receive 80 percent of the tax cuts.

As these huge tax cuts for the wealthy are financed (history shows they do not pay for themselves), the crumbs for everyone else will be dwarfed by devastating cuts to key investments in our communities. Immediately, everyday Kentuckians – from working parents and disabled kids to grandparents needing nursing home care – will feel the pain of cuts to health care, tax credits for low-income families and more. And as the full impact of tax cuts registers, trillions more will be cut from education, health care, food assistance, infrastructure, community development and more.

Congress is now focused on setting the stage for these cuts. Both the recently passed House budget resolution and the Senate’s plan are essentially vessels for reconciliation instructions the House and Senate are likely to negotiate and agree upon in order to fast-track passage of a tax cut bill. Those instructions would allow such a bill to pass with 50 rather than the 60 votes usually required.

A metaphor comes to mind: Rather than a stage, a table is being set. It’s being billed as a free lunch – a feast – for all Americans, but in fact, only the most powerful and wealthy among us are invited. The meal will be paid for by families and communities across the nation and leftovers will not be shared. The satisfaction of the guests will come at the expense of our country.

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