Analysis Shows Pension Bill Adds Huge New Costs for Teachers’ Plan

A new analysis of the proposed pension bill by the actuary for the Teachers’ Retirement System (TRS) shows huge new costs to the state from the legislation, including higher costs to pay down the existing unfunded liabilities. In total, the bill adds $4.4 billion in state costs for TRS over the next 20 years, including $645 million in costs in 2020.

There are several reasons for the added costs. First is the switch to the “level dollar” method of paying down pension liabilities, which massively shifts contributions to earlier in the 30-year schedule.

Second, the actuary says the closed defined benefit (DB) plan’s investments will only earn a 6 percent rate of return over time, as opposed to the 7.5 percent the plan would earn if it remained open. The actuary explains “since the DB plan would be closed and retirement patterns altered, leading to a change in cash flow requirements, TRS will need to alter its asset allocation and invest in more conservative options.” That drop in rate of return will require substantially higher employer contributions in the coming decades. The problem of lower returns in closed plans is described in more detail here.

Third, the actuary expects an increase in earlier teacher retirements because of benefit cuts made in the bill.

These big additional state costs are after taking into account any cost reduction from cuts to benefits in the legislation. That includes freezing cost of living adjustments for five years, a change that is of highly questionable legality.

The report also shows if Kentucky simply stays on its current funding path without more benefit cuts, the funded ratio of the plan will climb from 58.1 percent in 2019 to a healthy 80.6 percent in 2038. If the plan is closed, it will have a funded ratio of a smaller 71.3 percent in 2038. In that year, liabilities will be $9.6 billion with an open DB plan but $11 billion if the plan is closed in favor of a defined contribution (DC) plan. See the graph below on how unfunded liabilities are higher under the proposed pension bill than if Kentucky kept its current plan.

After the fifteenth year, the bill would result in lower annual costs, but that is because costs are shifted to earlier years through the level dollar method. Although the actuarial analysis did not look farther ahead, it is important to note that after the thirtieth year, unfunded liabilities are completely paid off under both the current scenario and the proposed bill. Annual costs will then drop steeply. The regular contributions will be the entire cost, and are no cheaper for employers under the new DC plan than the existing DB plan — though the DC plan will lower retirement security and make it much harder to attract and retain a skilled teaching workforce. The employer contribution in the DC plan is 6 percent of teachers’ pay, whereas the employer contribution in the current DB plan (known as the normal cost) is 5.8 percent of pay.

 

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U.S. House Tax Plan: Benefit for Richest 1 Percent in Kentucky Grows Over Time

A new 50-state analysis of the U.S. House tax plan released last week reveals that in Kentucky the wealthiest 1 percent of Kentuckians would receive the greatest share of the total tax cut in year 1 and their share would grow through 2027. Further, the value of the tax cut would decline over time for every income group in Kentucky except the very richest.

House leadership continues to tout this tax proposal, which would increase the federal deficit by $1.5 trillion over the next decade, as a plan to boost the middle class. But a closer examination of the bill’s provisions reveals that it is laser-focused on tax cuts for the nation’s highest earning households. The wealthiest Kentuckians’ share of the tax cuts would grow over time due to phase-ins of tax cuts that mostly benefit the rich and the eventual elimination or erosion in value of provisions that benefit low- and middle-income taxpayers. For example, after 5 years, the bill eliminates a $300 non-child dependent credit that benefits low- and middle-income families while fully repealing the estate tax in year 6 for the very large estates subject to the tax.

More specifically, the 10-year outlook for the plan reveals that by 2027, for the top 1 percent of households in Kentucky their share of the tax cut would increase from 25 percent in year 1 to 40 percent by 2027, for an average cut of more than $41,000. Middle-income taxpayers’ average tax cut would erode from $580 to $290 after 10 years. The tax cut for all income brackets except the richest one percent would decline during the nine year period.

“Let’s be clear: The U.S. House tax plan will primarily benefit the rich, across the nation and in Kentucky,” said Kenny Colston, communications director for the Kentucky Center for Economic Policy. “These tax cuts that mostly benefit top earners will add to the nation’s annual deficits and will come at the expense of low- and middle-income families who will likely lose more from funding cuts to education, health care, infrastructure and other public services than they gain from the small tax cuts they would receive.”

To read the entire report or get more details about Kentucky go to http://itep.org/housetaxplan

Bill to Save Kentucky’s Pensions Finally Released, but Success Remains Doubtful

Congress Moves to Fund Children’s Health Insurance, But At Others’ Expense

Op-Ed: Exaggerated Pension Panic Fueling Harmful Bill

This column originally ran in the Kentucky New Era on Nov. 2, 2017. It ran in the Lexington Herald-Leader on Nov. 3, 2017. It ran in the Princeton Times Leader on Nov. 15, 2017.

Kentucky needs a smart and measured plan to pay down our pension liabilities over time and improve our financial condition. But the bill released last week would cause unneeded harm to Kentucky’s workforce while creating an avoidable near-term crisis for our state budget and public services.

Underlying the plan are overstated claims about the size of Kentucky’s pension liabilities and the urgency with which these liabilities must be paid. There is a middle path between the denial that plagued lawmakers about these liabilities in the past and the “chicken little” mentality driving the discussion today.

A close look reveals the sky is not falling on the state’s retirement plans as a whole. The Kentucky Employees Retirement System (KERS) non-hazardous plan is overly depleted and needs extra resources as it gets back on its feet. But other plans don’t face those same challenges and the systems as a whole will return to full health over time through responsible funding.

Take the retiree health plans, for instance. Those plans are allegedly in such bad shape that employees who haven’t gotten a raise for most of the last decade must make an additional three percent contribution (the resulting monies don’t even benefit those funds, but that’s a different story). In fact, Kentucky’s retiree health plans are far better funded than similar plans around the country, which are typically operated on a pay-as-you-go basis.  And Kentucky already took actions in 2003, 2008 and 2010 to cut retiree health benefits and increase contributions from employees and other stakeholders. These plans are on strong footing, with their funded status improving rapidly over the last decade.

The teachers’ retirement system is also treated as if it is in crisis, but it has $17 billion in assets. Only last year did the state finally get back on track to fully fund that system. With its 30-year debt over half-paid at this point, the plan’s health will steadily improve if we stay on that funding path. The same is true with the county employees’ plan. The other state plans are small, making their liabilities manageable compared to Kentucky’s budget.

The pension liabilities we owe are a serious challenge, but it is important to remember they are not owed immediately. Over the next 30 years, the time frame in which we aim to pay them off, the Kentucky economy will generate trillions of dollars in income from which the state collects tax revenue. The plans are not set to run out of money, as is falsely claimed, unless the state reverts back to its old pattern of skipping contributions – which no one is proposing.

With time on our side, we don’t have to overreact if assumptions in the underlying plans don’t pan out over relatively short time periods. We can and should make regular course corrections to assumptions and tweaks to benefits while we steer the plans over time toward better health.

But “house on fire” claims have led to proposals that will unnecessarily harm current workers and even already-retired teachers through legally questionable cuts. And moving new employees to 401k-style plans will make attracting a well-qualified workforce very difficult and provide no savings to the state –  just more costs as investment returns decline in closed defined benefit plans whose portfolios must become more conservative.

The bill sets up a fiscal train wreck in the next budget with its requirement for immediate level dollar funding of pension liabilities, even for the better-funded teachers’ plan. By one estimate, it would mean finding an additional billion dollars in 2019 — revenue Kentucky does not now have. The method would massively front-load costs by making Kentucky put the same amount of money into pensions today as 30 years from now, ignoring how revenue and therefore ability to pay grows by about 3 percent each year.

Instead, we could take a careful approach to funding these liabilities that builds on how the General Assembly has aggressively stepped up funding to the plans in the last couple budgets. We can clean up some of Kentucky’s $13 billion in tax breaks. The resulting resources could further shore up KERS non-hazardous and allow us to continue fully funding the other plans as we have only just recently begun.

Importantly, doing so would also allow us to protect the investments in our schools, health and other building blocks of thriving communities. That’s a plan that not only meets our obligations, but ensures our future has promise as well.