Legislation introduced and passed suddenly in the General Assembly yesterday moves new teachers into a less secure hybrid cash balance plan and ends the inviolable contract moving forward for them, making their benefits vulnerable to further cuts in the future. Senate Bill 151 also caps the use of sick leave for teacher retirement benefits and weakens the already-modest hybrid cash balance for state and local non-hazardous employees.
New teachers lose inviolable contract, predictability of defined benefit plan
The bill ends the existing defined benefit plan for new teachers, shifting them to a hybrid cash balance plan where benefits depend on market returns. The plan only guarantees a 0 percent rate of return on teachers’ accounts using a 10-year average of investment returns, and gives teachers only 85 percent of returns above that 0 percent. It is highly unlikely that 10-year average returns will dip below 0 percent (as they haven’t in the past), meaning 15 percent of teachers’ investment returns will be lost to them.
By ending the inviolable contract for new teachers, the General Assembly can now also weaken the cash balance benefit at any time in the future. That could include lowering the amount employers credit to teachers’ accounts each year (set in the legislation initially at 8 percent of teachers’ pay, whereas teachers contribute their current 9.105 percent of pay) or giving them even less of the investment returns. Currently teachers have a legally protected benefit based on when they are hired, providing them with the security of knowing what they will receive when they retire.
SB 151 shifts about 1/3 of the cost of the hybrid cash balance plan to school districts, which must contribute 2 percent of new teachers’ pay for the benefit. This change will continue the trend of the state backing away from its responsibility to fund K-12 education and asking local schools to bear a larger share of costs. That pattern is creating a growing gap between rich and poor school districts, which is returning to levels that were declared unconstitutional in the 1980s.
The bill caps the use of sick leave in calculating retirement benefits for current teachers to the amount of sick leave accrued as of December 31, 2018. This change will also add more costs to local school districts that will have to pay more for substitute teachers as use of sick days increases. The bill raises the retirement eligibility for new teachers to age 65 with 5 years of work experience or at least age 57 and an age plus years of service that equal a minimum of 87. Currently, teachers can retire with full benefits at age 60 with at least 5 years’ experience or at any age with 27 years’ experience.
Because hybrid plans are individual accounts with a final balance, the plan includes no cost of living adjustment as exists in the teachers’ current pension plan (annuities could be structured under the cash balance plan so retirees receive higher incomes later in life, but only by sacrificing benefits in earlier years.)
An actuarial analysis of the impact of the legislation on the Teachers Retirement System is not yet available.
State and local workers plan cut again, defined contribution option takes resources from pension plan
The bill weakens the hybrid cash balance plan for state and local non-hazardous employees that was created just five years ago — evidence that ending the teachers’ inviolable contract means benefits might be cut further in the future. The state and local non-hazardous plan guaranteed workers a 4 percent rate of return and gave them 75 percent of investment returns above that amount, while the new plan under SB 151 will — like the benefit for new teachers — guarantee only a 0 percent rate of return and 85 percent of investment returns above that level. That means less in retirement benefits for these workers.
What’s more, the plan introduces a 401a defined contribution (DC) option for state and local non-hazardous employees in which the employer contributes 4 percent of pay (employees put in 5 percent). Workers who choose the DC plan cannot later switch back to the hybrid cash balance plan. The actuary says the DC plan is slightly more expensive than the weakened hybrid cash balance plan, and gives people 100 percent of investment returns rather than 85 percent in the cash balance option. Although DC plans are riskier for employees and will earn lower investment returns over time, the actuary projects that 25 percent of employees will end up in the DC plan. The more employees who contribute to the DC plan instead of paying into the defined benefit/cash balance plan pool, the more the traditional plan is vulnerable to further deterioration. SB 151 allows the Kentucky Retirement Systems (KRS) board to contract with an outside entity to manage the DC investments.
The bill also requires KRS employees hired between 2003 and 2008 to pay an additional 1 percent of pay for retiree health care. As noted here, Kentucky’s retiree health plans are already on a strong growth trajectory without the need for additional contributions, with the KERS hazardous health plan 118 percent funded now. The plan ends the ability of current employees to use sick leave service credit for determining retirement eligibility after 2023, and eliminates a $5,000 post-retirement death benefit for those hired starting in 2014.
Actuarial analysis of its impact on Kentucky Retirement Systems, which was attached after the bill was passed last night, shows it does not save money. It fact, it will cost $3.3 billion more for the state pension systems and $1.7 billion more for the local pension systems over the next 35 years. The added costs are because the plan resets the 30-year period used to pay off the liabilities to start in 2019 rather than 2013, lowering annual payments slightly but resulting in more costs over the entire period. The ability to reset the 30-year period shows that an urgency to pay off unfunded liabilities and repeated claims of imminent insolvency in the plans were unfounded.