Pension Legislation Should Solve Real Problems and Avoid Harmful Consequences

Legislative leaders say they will soon share a framework for potential pension legislation the General Assembly will consider in a special session this fall. Big questions loom over the legislation, including the following:

  • Will it actually reduce the existing unfunded liability Kentucky must pay down over time —the main pension challenge the state faces?
  • While legislators now say they will protect past cost of living adjustments for those already retired, will the bill also avoid breaking promises to current employees?
  • Will it raise costs in the near term through dramatic actuarial assumption changes — and what revenues will the General Assembly use to pay those expenses?
  • Will it lower the retirement security of future workers and create new challenges attracting and retaining a skilled public sector workforce?
  • Will it add costs in the future by closing the existing pension plans and shifting to more expensive designs?

What the General Assembly includes in final legislation has big consequences for many thousands of Kentuckians as well as our budget and economy. It is important that the plan take into account all of the facts.

Here is a wrap-up of recent KCEP research on the issue:

PFM Report Uses Exaggerated Claims to Justify Harsh, Counterproductive Cuts
The state’s pension consultant PFM recommended a set of harsh and counterproductive benefit cuts for retirees, current workers and future employees.

Switch to 401k-Type Plan for Kentucky Public Employees Will Cause More Harm
Research from experts and other states shows a move to 401k-type defined contribution (DC) plans often does not save money compared to the existing pension plans, introduces new transition costs and reduces retirement security for public employees.

Pensions Need Responsible Funding Plan, Not Exaggerated Claims
The PFM report overgeneralizes about the need to make large changes to actuarial assumptions, setting the table for drastic cuts in benefits. Instead, Kentucky needs a measured, responsible approach to paying down its pension liabilities over time.

Proposed 401ks Cost More Than Kentucky’s Existing Pension Plans
The DC plans proposed by PFM would cost more than Kentucky’s existing defined benefit (DB) plans, according to data from PFM and the retirement systems, even while delivering smaller benefits for workers.

Decline of Private Sector Defined Benefit Plans No Model for Public Plans
Calls to end Kentucky’s DB public pension plans often refer to the move away from DB plans in the private sector, but that decline is the result of factors that do not affect public sector plans.

Kentucky Will Face Transition Costs If It Shifts to 401ks
Proponents are claiming Kentucky will face no transition costs from moving employees into DC plans, but that assertion ignores the main reason there are transition costs: a closed plan must invest with a shorter time horizon due to an aging population, which will lower returns.

Level Dollar Approach Shifts Enormous Burden to Upcoming Budget
The proposed level dollar approach to funding Kentucky’s pension liabilities would shift a large burden to Kentucky’s upcoming state budget while asking comparatively little from budgets a couple of decades from now.

Level Dollar Approach Shifts Enormous Burden to Upcoming Budget

The proposed level dollar approach to funding Kentucky’s pension liabilities would shift a large burden to our upcoming state budget and ask comparatively little from budgets a couple of decades from now. Especially without any new revenue, the method creates pressure for harsh and unacceptable benefit cuts to retirees and workers along with unnecessarily damaging budget cuts that will further undermine key services.

This proposal to pay down all plans’ liabilities under a level dollar method comes from state consultant PFM. Under the approach, payments would be about the same dollar amount each year until liabilities are paid off. Level dollar is in contrast to the much more common level percent of pay approach Kentucky currently uses, which distributes payments over time as an equal percentage of what employers spend on workers’ salaries.

That change, combined with much lower investment return assumptions, would add a hefty $1 billion in General Fund costs to the state budget in 2019, according to PFM’s report. In total, General Fund obligations for pensions would equal $2.47 billion in 2019 or a massive 23 percent of Kentucky’s General Fund budget.

With a level dollar approach, 15 years later the General Fund contribution for pensions will be roughly the same as in 2019, at $2.29 billion. But the commonwealth’s ability to pay will be higher later due to inflation and growth in the economy in the intervening years.

To illustrate this difference: Over the last 20 years, General Fund revenue has grown by an average of 3.1 percent per year. If that modest trend continues in the future, the state will have 59 percent more revenue in 2034 than it will have in 2019, as the graph below shows. Yet, as mentioned, under the level dollar method the state would be paying no more toward pensions in 2034 than it is in 2019. The level dollar approach heavily front loads costs as a share of spending, squeezing everything else in the budget during the early years. The level percent of pay method, in contrast, aligns contributions with the state’s ability to pay.

In an ideal world, it would be great to pay off debts as soon as possible with much bigger payments up front. But there are trade-offs to doing so — especially when new resources are not available to make those contributions. And as we describe here, there is no strong argument within the systems for using level dollar for Kentucky’s better-funded pension plans like those for teachers and local employees.

Moving to a level dollar approach for all plans would place a major hardship on the budget in 2019 and the years immediately thereafter, even as the General Assembly has not yet put any new revenue on the table to pay for it. These increased contributions will require deeply damaging cuts to investments in education, health and human services, infrastructure and more. Already, Kentucky faces budget gaps ranging from a crisis in social worker caseloads to rising inequity between rich and poor school districts, soaring college tuition and a lack of employee raises.

Kentucky also cannot fund these dramatically higher payments by breaking promises to retirees and workers, such as through PFM proposals to roll back cost of living adjustments and raise the retirement age for current workers. And shifting to 401ks won’t help.

Instead, Kentucky needs a responsible and reasonable plan for paying down its liabilities over the coming decades — one that protects our critical public investments and steps up to meet our obligations to workers and retirees. Simply shifting to the level dollar method for all plans and putting no new revenues forward to pay for it would not meet that test.

Federal Tax Cut Framework Is Designed for Millionaires

Under the tax framework released last week by the Trump administration and Congressional leaders, the wealthiest 1 percent of Kentuckians would get 49.5 percent of the total tax cut received by people in the state, according to a new report by the Institute on Taxation and Economic Policy (ITEP). Though the proposed framework has been hailed as a tax break for the middle class, the report finds it would redistribute massive amounts of wealth upward, while raising taxes for some and worsening income inequality nationwide.

The plan’s cuts are extremely top-heavy

The graph below illustrates just how disparate the tax cuts are: the average tax change for Kentuckians with income in the bottom 60 percent is $210, while the average tax change for Kentuckians with income over $1 million is 458 times larger at $96,200.

ITEP’s analysis shows that under the plan, the very wealthy would get larger tax breaks than everyone else based on total dollars, and would also receive a disproportionate share of the total tax break. The entire bottom 60 percent of Kentuckians would get just 14.4 percent of the net tax cut in the state in 2018, while millionaires who comprise just 0.4 percent of the population would receive 40.2 percent of the total tax cut. In all but a few states, the top 1 percent take home at least 50 percent of the tax cuts and nationally, the top 1 percent of Americans will take home 67.4 percent of the tax cuts in 2018.

It isn’t just low and middle income Kentuckians and Americans who lose out in the plan – it is anyone who is not ultra-wealthy. In Kentucky, those making less than $460,800 would see an average tax cut between 0.6 and 0.8 percent as a share of their income in 2018, while people making more (those in the top 1 percent) would see their income increase by 3.2 percent on average. The graph below puts the dollar size of the impact of these tax cuts into perspective.

As is also illustrated in the graph, because Kentucky has fewer wealthy people and they aren’t as rich as wealthy people nationwide, their average tax cut and the total tax cut Kentucky receives are smaller. Though Kentucky tax returns comprise 1.3 percent of total U.S. tax returns in ITEP’s analysis, the commonwealth will receive only 0.9 percent of the benefit from the net tax cut.

The plan will become more top-heavy over time because of a slower-growing inflation index than what is currently used and the fact that the plan’s boost in the Child Tax Credit is not indexed to inflation. The Tax Policy Center estimates that by 2027, 80 percent of the benefit of tax cuts would go to the richest 1 percent of Americans. Income inequality is already too high and growing in Kentucky and the nation, and the plan will only exacerbate the trend.

The Devil is in the details

Although the plan slightly expands the Child Tax Credit and creates a new credit for non-child dependents, a larger, more fully refundable Child Tax Credit for an expanded group of low- to middle-income families and an expanded Earned Income Tax Credit – paid for by cleaning up tax breaks for corporations and the ultra-wealthy – could do more to grow and lift America’s middle class. But the plan doesn’t propose these types of changes. Rather, it slashes taxes for the wealthy and mostly neglects everyone else. The plan would:

  • Repeal the Alternative Minimum Tax (AMT), which exists so that wealthy people who can claim multiple exemptions and deductions still pay a minimum level of taxes.
  • Regressively compress the number of individual income tax brackets and rates from 7 to 3, lowering the top rate from its current 39.6 percent to 35 percent and raising the bottom rate from 10 percent to 12 percent.
  • Double the standard deduction, repeal personal exemptions and eliminate some itemized deductions, a combination that will increase taxes for some moderate- to middle-income and many upper-middle income households – 13.2 percent of all Kentuckians and about 1 in 3 with income between $96,000 and $460,000.
  • Increase the Child Tax Credit (though by a static amount, which will not grow over time, and that does not improve the refundable portion of the credit) and create a new credit for non-child dependents.
  • Cut the corporate income tax rate from 35 to 20 percent, despite the fact that the current effective rate is much lower than 35 percent, and many large corporations pay no taxes.
  • Create a lower tax rate for pass-through income – a huge tax break for many very wealthy individuals and large businesses that could also cause some businesses to restructure as pass-through entities, and some highly compensated individuals to incorporate and provide services as contractors in order to avoid the higher tax rate on corporate profits or individual income.

The plan would also repeal the estate tax on large estates/wealthy heirs, the domestic production deduction and other unspecified tax breaks for businesses, and would allow businesses to deduct or “expense” the value of their capital expenditures rather than depreciate those expenditures over time.  The framework also eliminates corporate taxes on offshore profits (this final component is not included in ITEP’s analysis but would overwhelmingly benefit those at the top).

Tax cuts for the wealthy would not trickle down to everyone else

This “Robin-Hood-in-reverse” approach to tax reform would cut federal revenue by $233.8 billion in 2018 and by $2.4 trillion over the next decade. This week, the U.S. Senate is marking up their budget resolution, which incorporates provisions to ease the way for the tax cuts. Specifically, these provisions would fast-track the cuts, allow an increase the national deficit by $1.5 trillion over 10 years and cover the rest through deep budget cuts to programs like Medicaid, Medicare and Social Security which help millions of low and middle-income Americans meet basic needs.

Despite the insistence that tax cuts for the wealthy and corporations improve economic growth and trickle down to everyone else, the evidence suggests the opposite would occur: by forcing budget cuts in programs that provide key supports for low- and middle-income people, tax cuts like these will deepen poverty and inequality in Kentucky and America.

5 Things Kentuckians Need to Know About Federal Budgets Being Voted on This Week

This week both the U.S. House and Senate are expected to vote on budget proposals that would have a devastating impact on Kentuckians. The full House will be voting on its budget resolution, which passed committee in July. The Senate will be “marking up” its recently released budget as well, a process of considering the plan in committee with the opportunity to make changes before the committee votes. In both budgets, critical investments in our state are at risk — and with Kentucky more heavily reliant on federal spending than most states, these proposals would be especially harmful to Kentuckians. Here are five things to be concerned about:

Proposals cut non-defense discretionary programs that help Kentucky families make ends meet and move ahead

Non-defense discretionary (NDD) programs fund investments that range widely, including elementary and secondary education, the Community and Mental Health Services block grant, the Centers for Disease Control and Prevention, job training and employment, rental assistance, child care and water infrastructure. The proposed cuts in both budgets would therefore harm our state’s ability to improve education, support children and families, make our communities safer and healthier and develop the workforce and economy.

In the House budget, proposed cuts to NDD programs of $1.3 trillion from by 2027 would make appropriations 17 percent below the 2010 level after adjusting for inflation — and 22 percent below once population growth is taken into account. Overall funding for this part of the budget has already fallen significantly since 2010 because of the Budget Control Act’s caps on discretionary programs and sequestration cuts. NDD funding would be 44 percent below its 2010 level by 2027 with the cuts in this budget proposal, after adjusting for inflation.

The Senate budget resolution would cut NDD funding by $632 billion between 2019 and 2027.

Food assistance, Medicaid and other important entitlement programs at risk for deep cuts

Families and individuals who are eligible based on their income for entitlement programs receive assistance meeting basic needs. The House budget resolution proposes $4.4 trillion in cuts to these key federal investments that help Kentucky families, including:

  • The Supplemental Nutrition Assistance Program (SNAP), formerly known as “food stamps,” that helps 651,889 low-income Kentuckians afford basic nutrition. SNAP would be cut by at least $150 billion over the decade, more than 20 percent of the SNAP budget.
  • Medicaid, which currently provides health coverage for one in four Kentuckians, would be cut by $1.5 trillion over the next ten years (details in the following section).
  • Pell Grants would be cut by $75 billion over the next decade. Pell helps expand college access and opportunity to people who would otherwise be priced out of higher education. Last year 102,360 Kentucky students received a Pell grant. Under this proposal, the maximum grant would be cut by $1,060 or 18 percent, even while the purchasing power of Pell has already declined significantly in recent years as the costs of college have risen. Kentucky’s postsecondary institutions received $373,576,000 from Pell in 2016-2017.
  • Other programs at risk for cuts in the House budget include Social Security Insurance (SSI), Temporary Assistance for Needy Families (TANF), the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).

The Senate budget proposes to cut entitlement programs by at least $4 trillion over the coming decade. Although few details about these cuts are in the current version of the proposal, cuts to food assistance, health care, tax credits for low-income families and other essential supports would be unavoidable under such a deep funding cut.

Health care for Kentuckians threatened in both budgets

The budget proposal currently slated for a floor vote this week in the House includes cuts to health care that takes several forms. Perhaps most harmful are changes to the financial structure of Medicaid that result in permanent and annual cuts to the program, which would occur under what is known as a block grant or a per capita cap. Both of these policies limit how much a state receives for its Medicaid program, and then annually increases that amount more slowly than growth in the cost of medical care. The end result is a state’s medical bills would outpace the funds available to pay for them, leading to fewer people covered, fewer health services offered or even smaller payments to health care providers.

The House budget proposal also assumes passage of the American Health Care Act, the initial attempt to make deep cuts to low-income health care coverage. It is unclear at this point whether those changes still apply as Congress missed the deadline to pass that legislation.

The Senate proposal is much less clear in the ways it would affect health care coverage. Much of that plan is designed to make huge tax cuts that increase the deficit and rely on big spending cuts to Medicaid, Medicare and other programs that fall under the purview of the Senate Finance Committee. Additionally, the Senate plan calls for $4 trillion in cuts to entitlement programs, like Medicaid and Medicare, over the next decade. The Senate budget also leaves the door open for future attempts at repealing the ACA, which the Congressional Budget Office estimates would lead to anywhere between 15 and 32 million fewer people covered nationally, depending on which legislation is used.

Kentucky benefits greatly from federal health care programs. Over 1.4 million Kentuckians access Medicaid coverage to get care when they need it, and an additional 862,900 Kentuckians are covered by Medicare. Cuts to these programs would almost certainly lead to an increase in our uninsured and hit local economies that benefit from health care spending.

Both budget plans fund tax cuts for the wealthy

Both budget proposals are structured in a “Robin-Hood-in-reverse” way that uses program cuts described above – which would deeply impact low and middle income Americans – to pay for huge tax cuts for the wealthiest Americans.

The House plan calls for a number of major tax cuts for the wealthy and corporations that would cost trillions of dollars over the next 10 years. It would:

  • Lower and consolidate individual tax rates.
  • Repeal the Alternative Minimum Tax which ensures wealthy people who can claim many exemptions and deductions pay at least a minimum level of taxes.
  • Cut corporate tax rates and set a special, lower rate for “pass-through” business income that would allow some high-income individuals and corporations to pay taxes on their business income at a very low rate.
  • Eliminate corporate taxation of profits earned outside of the U.S.
  • Approve provisions in the House-passed American Health Care Act that would eliminate taxes on the wealthy and corporations that helped pay for improvements in health care under the ACA.

A tax plan released alongside the Senate budget resolution last week calls for a total of $2.4 trillion in tax cuts over the next 10 years. It is comprised of big breaks for the wealthy and corporations similar to those in the House budget but would also repeal the estate tax on the wealthiest heirs in America, double the standard deduction and clean up some unspecified deductions, though not the mortgage interest and charitable deductions which are especially skewed to the wealthy. To “pay for” these tax cuts – 80 percent of which would go to the wealthiest 1 percent of Americans by 2027 – the Senate budget plan would allow the deficit to increase by $1.5 trillion by 2027 and cut programs under the Senate Finance Committee’s jurisdiction such as Medicaid, Medicare, SSI, the Child Care and Development Block Grant, Independent Living and many other vital programs.

Budgets use reconciliation process to fast-track cuts

Both budget plans use the fast-track process of budget reconciliation to immediately move forward some of these cuts. Through reconciliation, Congress is able to pass cuts — including tax cuts — with only a simple majority in the Senate (i.e., without any Democratic votes) using the same process that has been used recently to try to repeal and replace the ACA.

The programs at risk for $203 million in fast-track cuts in the House Budget include SNAP, Medicaid, SSI, Pell, and the EITC and CTC — programs provide important assistance to Kentuckians across the state. These cuts would pave the way for large-scale tax legislation that features substantial tax cuts.

The Senate plan would fast-track the $1.5 trillion in deficit-growing tax cuts described above, plus more as long as they are offset by slashing public investments.

Kentucky Will Face Transition Costs If It Switches to 401ks

Proponents are claiming Kentucky will face no transition costs from shutting down its defined benefit (DB) pension plans and moving employees into 401k-type defined contribution (DC) plans. That assertion ignores why there are transition costs from closing a plan.

DB plans are pre-funded, as the governor’s staff recently noted in an email to the General Assembly that cited an article from the Reason Foundation. Being pre-funded means DB plans are not designed for new workers to directly pay for the benefits of retired workers. Looking at that fact alone, one could conclude there are no transition costs from switching to DC because the legacy debts from the DB plan must be paid off regardless. But as we outlined in our recent report, closing a plan makes it more expensive to pay down remaining liabilities because of the lower investment returns the closed plan will earn for the decades it will continue to pay benefits.

One reason DB plans earn high returns over time is a mix of workers of different ages, which allows the plans to keep an investment portfolio aimed at maximizing long-term gains. Switching to DC ends that. When a government cuts off participation in a DB plan, the closed plan is made up of a steadily aging population rather than a balance of younger, middle-aged and older workers. The closed plan must continue to earn strong investment returns in order to have the funds needed to pay benefits until the last eligible retiree dies many decades in the future (investment returns make up nearly two-thirds of the ultimate benefit a worker receives in a DB plan).

Because a growing share of the closed DB plan’s members will retire and draw benefits each year, the plan must take on a more conservative and liquid portfolio over time than if the plan remained open to new members. That will lower its investment returns. Lower investment returns require higher employer contributions to pay off the liability, adding substantial costs in future decades.

The added cost from lower returns is a major reason many states that have considered moving employees into DC plans decided against doing so. Studies by states that have looked into the issue are summarized here, courtesy of the Keystone Research Center:

Arizona

An analysis of the DB and DC plans conducted by the Arizona Retirement System in 2006 concluded: “If the goal of a retirement plan is to provide the least expensive method of providing a basic guaranteed replacement income to the members, then the defined benefit plan appears to provide a significant advantage for the majority of participants if the plan choices are mutually exclusive.” 1 

California

A 2011 study for the California Public Employees’ Retirement System concluded that closing the DB plan would lower investment returns of plan assets due to a shrinking investment time horizon and the need for more liquid assets. 2  The study also concluded that freezing the DB plan would incur the increased administrative costs of a DC plan and the costs associated with having two systems concurrently.

In 2005, Milliman, an actuarial firm hired by the Los Angeles County Boards of Retirement, studied the fiscal impact of placing Los Angeles County employees hired after July 1, 2007 into a new DC retirement plan instead of the current DB pension. Milliman estimated that the county’s DB plan contribution rate would rise by 3.66 percentage points, increasing required contributions to the closed DB plan by $206 million in 2008. While the contributions would then decline over time, the county would not see any savings in DB plan costs until 2018. The actuary also found that there could be a “transition cost” of the switch to a DC plan: Investment of assets may need to be more conservative because no new members would be added after July 1, 2007, reducing investment returns and requiring the employer to pay more to fund retirement benefits.

Colorado

A study by Buck Consultants under contract to the State Auditor in 2001 concluded that “…it is more expensive for a defined contribution plan to provide a career employee with the same level of retirement benefits as a defined benefit plan…” 3

Kansas

An actuarial study examined questions related to closing the DB plan (with no new hires becoming members of the DB plan). 4 The study concluded, “The System’s current asset mix reflects its position as an institutional investor with a very long time horizon. In anticipation of the closed plan moving into a negative cash flow situation, the target asset mix would be rebalanced to produce a greater degree of liquidity, reflect a shorter time horizon for investment, and the resulting lower risk tolerance level. The System’s ability to invest in illiquid asset classes, such as private equity and real estate, would be reduced. The System’s shorter time horizon for investment would dictate a reduction in the higher return producing asset classes, which produces more volatility of returns. The System’s need to hold more cash equivalents to meet outgoing cash flows would also reduce the total return of the investment portfolio. As a result, the return on the portfolio would be expected to be lower than the investment return assumption on an ongoing basis. The lower investment return would result in higher contributions needed to provide the same benefits.”

Minnesota

A 2011 study for the Minnesota State Legislature found that the transition costs of switching new hires from DB pensions to DC plans “…would be approximately $2.76 billion over the next decade for all three systems.” 5  The analysis explained that costs increase during a transition period because once a plan is closed to new members any unfunded liabilities remaining in the existing DB plan must be paid off over a shorter timeframe.

 Nevada

A 2010 Segal Company study of Nevada’s proposal to put new hires in a DC plan found that the state’s total pension costs would increase. 6 

New Hampshire

The New Hampshire Retirement System performed an analysis on proposed 2012 DC legislation related to the benefit plan design and funding. 7 The report found that closing the DB plan to new hires would increase the unfunded liability by an additional $1.2 billion, and closing the DB plan to new workers would likely lead to changes in investment allocations, including an increase in more conservative investments with lower returns, because over time it would become a retiree-only system.

New Mexico

The New Mexico legislature requested analysis on the implications of moving from a DB program to a DC program for all new education employees in 2005. 8 The analysis was conducted by Gabriel, Roeder, Smith & Company, and as the report explained, when a DB plan is closed to new hires, “…since a growing portion of plan assets must be used to pay benefits, a growing portion of assets will likely be held in short-term securities, thereby reducing investment returns.”

New York

In 2011, a study was conducted by the National Institute on Retirement Security and Pension Trustee Advisors on behalf of the Office of New York City Comptroller John C. Liu. 9 The study found that costs associated with traditional pensions range from 36 percent to 38 percent less than a DC plan providing equivalent benefits. Longevity risk pooling saves from 10 percent to 13 percent, maintenance of portfolio diversification saves from 4 percent to 5 percent, and superior investment returns saves from 21 percent to 22 percent.

Pennsylvania

Three different actuaries concluded that closing Pennsylvania’s DB pensions to new employees would gradually erode investment returns leading to a $42 billion increase in unfunded liabilities.10

Texas

The Employee Retirement System of Texas in 2012 noted that, in many cases, the increased cost of freezing a DB plan, combined with the inefficiencies of DC plans made it sensible to “modify the existing plan design instead of switching all employees to an alternative plan structure.”11 The Teacher Retirement System of Texas concluded that even if contributions remained the same as in the current DB plan, participants in an individually directed DC plan would have only a 50 percent chance of earning investment returns high enough to get 60 percent or more of the DB plan benefit. 12 The study found that it would cost 12 percent to 138 percent more to fund a target benefit through alternative retirement systems. Individually directed DC accounts were found to be the most costly, and a DB system the least costly. Finally, the study estimated that freezing the DB pension could cause the liability to grow by an estimated $11.7 billion — 49 percent higher than the current liability —due to lower investment returns resulting from a transition to a more liquid asset allocation.

Wisconsin

A 2011 study for the state legislature analyzed the impact of establishing a DC plan as an option, among other potential changes to the Wisconsin Retirement System (WRS). The final report stated: “Actuarial analysis indicates that to provide a benefit equal to the current WRS plan, an optional DC [defined contribution] plan would require higher contributions than employers and employees currently pay.” The study recommended: “Given the current financial health and unique risk-sharing features of the WRS, neither an optional DC plan nor an opt-out of employee contributions should be implemented in Wisconsin at this time. Analysis included in this study from actuaries, legal experts, financial experts, and information from similar studies conducted in other states show that there are significant issues for both study items in terms of the actual benefit provided and potential for negative effects on administrative costs, funding, long term investment strategy, contribution rates, and individual benefits.”13

In addition to these transition costs, a switch to DC can be more expensive if the employer contribution to the DC plan is more than the so-called employer normal cost of the DB plan (the amount actuaries estimate must be contributed each year for the benefit). The Reason Foundation admits that fact in the article linked above. In Kentucky’s case, the DC plans proposed by the consultant PFM do cost more than the state’s existing pension plans, according to data provided by the consultant itself and the systems’ actuaries.

  1.  Paul Matson and Suzanne Dobel, “A Comparative Analysis of Defined Benefit and Defined Contribution Retirement Plans,” Arizona Retirement System, 2006, http://www.nasra.org/files/State-Specific/Alaska/ASRS_DBDC_White_Paper.pdf.
  2.  California Public Employees Retirement System, “The Impact of Closing the Defined Benefit Plan at CalPERS,” March 2011, http://www.nasra.org/files/State-Specific/California/closing-impactCalPERS.pdf.
  3.  Buck Consultants, Incorporated, “Study of Retirement Plan Designs for the State of Colorado Pursuant to Senate Bill 01-049,” http://www.leg.state.co.us/OSA/coauditor1.nsf/All/5F3AC8C645174C5087256E30007BC1D8/$FILE/1409%20PERA%20Fin%20FY%2002.pdf.
  4.  Kansas Public Employees Retirement System (KPERS or the System) and Cavanaugh Macdonald Consulting LLC (Cavanaugh Macdonald), “Fiscal Impact Report: Senate Substitute for HB 2194 and House Substitute for HB 2333 Conference Committee on Senate Substitute for HB 219.”
  5.  Retirement Systems of Minnesota, “Retirement Plan Design Study,” June 1, 2011, https://www.minnesotatra.org/IMAGES/PDF/dbdcfinalfull.pdf.
  6.  Segal Company, “Public Employees’ Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit Contribution Retirement Plans,” http://www.nvpers.org/public/executiveOfficer/2010-DB-DC%20Study%20By%20Segal.pdf.
  7.  Gabriel, Roeder, Smith, and Company, “New Hampshire Retirement System, Defined Contribution Retirement Plan Study,” January 11, 2012.
  8.  Gabriel, Roeder, Smith, and Company, “Defined Contribution Retirement Plan Study for the New Mexico Educational Retirement Board,” October 14, 2005,  http://www.nasra.org/Files/Topical%20Reports/Defined%20Contribution%20Plans/New_Mexico_ERB-DC.pdf.
  9.  William Fornia, “A Better Bang for New York City’s Buck,” October 2011, http://www.nirsonline.org/index.php?option=com_content&task=view&id=653&Itemid=61.
  10.  A letter from Cheiron, the consulting actuary for Pennsylvania’s Public Employee Retirement Commission (PERC), to PERC summarizes the transition costs of the Pennsylvania Senate version (SB 922) of Governor Corbett’s 2013 401k-type proposal based on the actuarial studies by the Pennsylvania School Employees Retirement System (PSERS) and State Employees Retirement System (SERS) actuaries. Tables 5 and Table 6 of the Cheiron letter show transition costs of $35 billion for PSERS and $7.2 billion for SERS, for a total of $42.2 billion (on a cash flow basis – i.e., in nominal dollars not dollars in hand today, which economists call “present value” dollars). See “Letter from Tony Parisi to James L. McAneny, Executive Director, Public Employee Retirement Commission, Re: Senate Bill No. 922 (Printer’s No. 1252, as Amended by AO2498),” in Public Employee Retirement Commission, Actuarial Note Transmittal, Senate Bill Number 922, Printer’s Number 1252, as amended by Amendment Number 02498, pp. 21-35. See also Stephen Herzenberg, “A $40 Billion Dollar Oversight: Actuarial Studies Document High Cost of Governor’s Pension Plan,” Keystone Research Center (KRC), http://keystoneresearch.org/publications/research/pension-primer-7-40-billion-dollar-oversight. This KRC brief was written based on actuarial studies of the House version of the Governor’s 401k proposal, which also included benefits cuts for current members. Nonetheless, the findings on the transition cost estimates are essentially the same as those summarized by Cheiron based on the actuarial studies of the Senate version of the Governor’s proposal, which did not include benefit cuts.
  11.  Employee Retirement System of Texas, “Sustainability of the State of Texas Retirement System, Report to the 82nd Texas Legislature,” September 4, 2012, https://ers.texas.gov/About-ERS/Reports-and-Studies/Reports-and-Studies-on-ERS-administered-Benefit-Programs/2012_IBS-Retirement-Report.pdf.
  12.  Teacher Retirement System of Texas, “Pension Benefit Design Study,” September 1, 2012, https://www.tasanet.org/cms/lib/TX01923126/Centricity/Domain/25/pension_study.pdf.
  13.  Wisconsin Department of Administration (Department of Employee Trust Funds, Office of State Employment Relations), “Study of the Wisconsin Retirement System in Accordance with 2011 Wisconsin Act 32,” June 30, 2012; http://etf.wi.gov/publications/wrs-study.pdf.

Medicaid Works for Kentucky

Medicaid provides health care coverage to over 1.4 million Kentuckians. For over 50 years it has helped pregnant women, children, people with disabilities and seniors and in the past 3 years it has allowed all low-income Kentuckians under 138 percent of poverty to get care when they need it. This critical health program has been at risk in 2017 for severe cuts under healthcare repeal efforts in Congress, and will face continued threats for more cuts through the federal budget process and the changes to Kentucky’s Medicaid program proposed to the federal government.

Who Receives Coverage?

Medicaid covers 1 in 3 Kentuckians. Over 475,000 of those are people newly covered thanks to the 2014 expansion of eligibility for Kentuckians with incomes up to roughly $16,670 for an individual. Medicaid works well as a program that responds to poverty – the parts of the state with the deepest poverty have the highest rates of Medicaid coverage.

Some populations require much more health care spending than others, as reported in Kaiser Family Foundation data on what Kentucky spends on different kinds of Medicaid enrollees. Particularly, the aged and disabled require much more in health care spending than do children and adults, including adults newly covered by the Medicaid expansion. In fact the aged and disabled make up only 26 percent of enrollees, but 53 percent of all health care spending through Medicaid in Kentucky.

Kids

Medicaid covers 537,736 Kentucky children – or 42 percent of all children across the commonwealth. Over half of children with disabilities and 81 percent of children from families at or near the poverty line are covered by Medicaid. Children receive a comprehensive set of health services through Medicaid known as Early Periodic Screening Diagnostic and Treatment that ensures children have routine screening for various disabilities and health issues and coverage for subsequent treatment when needed.

Children who are covered by Medicaid have been shown to do better later in life in a number of ways. Research has shown Medicaid-covered kids have more success in school, become healthier adults and are more financially successful as adults than similar kids who didn’t get Medicaid.

Women

Women comprise 55 percent of Medicaid enrollees in Kentucky, and receive important health care services like gynecological care and mammography through the program. Medicaid also pays for prenatal services and 44 percent of all births in the commonwealth. Even before Kentucky expanded Medicaid in 2014, low-income pregnant women were covered by Medicaid through birth and for a short period of time post-partum. This was especially important prior to the passage of the Affordable Care Act when commercial insurance carriers who sold policies directly to people (rather than through an employer) were not required to offer maternity care as a benefit.

Seniors

Roughly 1 in 6 Kentucky seniors (people 65 years old and older) receive Medicaid, according to 2015 Census data. Contrary to what many people assume, Medicare is not comprehensive: it does not cover many health care services for seniors, including long-term care. Medicaid picks up much of the cost for seniors who cannot afford to cover gaps in Medicare coverage. In fact, Medicaid pays for 54.7 percent of nursing home care. It also covers over 39,000 Kentuckians using Home and Community Based Services through Medicaid, which includes both seniors and people with disabilities. These services allow dependent adults and children with significant medical needs to stay with their families and in their communities rather than receive care in an institutional setting like a nursing home. These services cost roughly a third of what they would in a nursing home setting.

People with Disabilities

There are over 770,000 Kentuckians with a disability that interferes with their everyday lives. These disabilities often require medical attention that far exceeds average health care costs for people without disabilities.  For all but the most wealthy individuals, the extra costs associated with that care are difficult or impossible to manage. Medicaid is a crucial program for people in this situation. In addition to providing coverage for costly residential long-term care for those who need but cannot afford it, in Kentucky Medicaid pays for six special programs (known as waivers) for individuals who wish to remain in the community, but cannot afford to do so on their own.

Many more Kentuckians receive Medicaid due to a disability but are not waiver recipients because their disabilities don’t require nursing facility level care or wraparound community-based services. Medicaid also pays for $34.5 million in in-school health care services for children, primarily those requiring medical assistance under the Individuals with Disabilities in Education Act.

What does Medicaid Coverage Mean for Kentuckians?

With the recent expansion of Medicaid came a dramatic increase in health care coverage. Because of that, more Kentuckians are able to get health care services and have started down the long path toward better health. And according to a study from the Harvard School of Public Health, Medicaid expansion-eligible adults in Kentucky and Arkansas, where Medicaid eligibility was expanded, have seen more improvement in health access and outcomes than in Texas, which did not expand Medicaid.

Access to health care services has increased

After the expansion of Medicaid, more Kentuckians began using primary care, getting screenings for potentially dangerous conditions, taking prescribed medicines rather than skipping them due to cost, and receiving routine care for chronic conditions. One particularly astounding increase in care is the 500 percent increase in Medicaid-funded substance abuse treatment between 2014 and 2016. And because more Kentuckians are using care in the doctor’s office, fewer are seeking care in the more expensive emergency room as their usual source of treatment.

Kentuckians are getting healthier

Receiving more screenings and regular health services in a primary care setting is putting many Kentuckians on the path to better health, which is starting to show up in the numbers. Preventable hospitalizations for ailments like asthma and hypertension have fallen since before expansion. Breast cancer deaths and infant deaths have both fallen in Kentucky. And along with an increase in smoking cessation counseling, fewer Medicaid-expansion-eligible Kentuckians are smoking, which is important as Kentucky leads the nation in lung cancer deaths. There has even been a five percentage point increase in Medicaid expansion-eligible adults reporting excellent health.

How Does Medicaid Impact Kentucky’s Economy?

Medicaid spending is an investment in our state and local economies: funding is disbursed to hospitals, clinics, pharmacies, long-term care facilities, and many other kinds of healthcare providers who use portions of that money to hire more people and build new facilities. The resulting salaries circulate through local businesses and generate more tax revenue to be reinvested back into the community. Furthermore, better health improves Kentuckians’ ability to earn income and pay taxes.

Public Investment

Kentucky invested nearly $5.8 billion in care for Medicaid enrollees in 2012; by 2016 that amount had risen to $10 billion. The majority of these resources were from the federal government, including all of the funding increase for the Medicaid expansion in 2014-2016. This is a windfall not only for patients and health care providers, but also for local economies. Estimates for the level of increased economic activity generated by investment in health care vary, but they range from $1.50 to $2.00 for every dollar invested.

Job Growth from Expansion

Since December 2013, the month before Kentucky expanded Medicaid, Kentucky has added over 15,000 health care and social service sector jobs and added them at a faster pace than the preceding years, according to BLS data. Half of those added jobs were in hospitals even though hospital jobs only make up a third of that sector overall.

Less Uncompensated Care for Providers and Debt for Individuals

The influx in funding associated with the expansion has made a huge difference for providers who otherwise might not have been paid for the care they offered. Uncompensated or charity care has dropped 67 percent since 2012 according to a study on the implementation of ACA in Kentucky.

The growth in Medicaid coverage has also helped reduce unpayable medical bills among patients. According to the Urban Institute, past-due medical debt dropped from 42.1 percent of adults aged 18-64 in 2012 to 30.9 in 2015, nearly a 27 percent decline. This is an important development as health care related debt is a major contributor to personal bankruptcy.