KY Policy Blog

PFM Report Uses Exaggerated Claims to Justify Harsh, Counterproductive Cuts

By Jason Bailey
August 28, 2017

The final report from the state’s pension consultant PFM uses exaggerated claims about the condition of all of the state’s pension plans to justify harsh and ultimately counterproductive cuts to retirees, current workers and future employees.

PFM bases its recommendations on claims that existing actuarial assumptions must be altered immediately and dramatically for all of the state’s pension plans. Those changes add $1.8 billion to employer contributions in 2019 above what they would otherwise be.  But while the depleted state of the Kentucky Employees Retirement System (KERS) non-hazardous plan merits additional contributions beyond what its prior assumptions required, PFM applies very conservative assumptions to all of the state’s plans to get to that number — even those plans that are in much better condition.

For example, PFM recommends lower investment return assumptions and a so-called “level dollar” approach to paying down liabilities for the Teachers’ Retirement System (TRS), even though unlike KERS non-hazardous, TRS is 55 percent funded with $17 billion in assets and a payroll that is growing. That change to TRS makes up 47 percent, or $862 million, of the $1.8 billion in added cost PFM claims is necessary, as the graph below shows.

The level dollar approach says the state should be contributing the same dollar amount to TRS now that it will 30 years from now, even though inflation, the economy and population will continue growing between now and then (the latter is why most all pension systems use a level percent of pay method, which allocates costs more evenly as a share of expenses, rather than a level dollar approach that requires sharply higher up-front payments).

Overstated claims from PFM about what must be contributed set the stage for major benefit reductions. Here are some of the ways PFM’s proposals would harm different groups of workers.

Retirees

PFM recommends clawing back cost of living adjustments (COLAs) given to retirees in all of the plans (including state and local workers, teachers and police) between the years 1996 and 2012. The consultant states that members “who retired in 2001 or prior could have their benefit rolled back 25 percent or more if past COLAs were completely eliminated from prospective benefit payments for retirees.” This cut is one of the report’s biggest, and would severely reduce the quality of life for many retirees — especially those who are older.

Also, PFM would end future pension benefit COLAs for retired teachers (including current teachers after they retire) until the plan is 90 percent funded (which would be far in the future — PFM projects the TRS plan will be 84 percent funded in 2034.) Teachers currently receive a COLA of just 1.5 percent, in part because they do not participate in Social Security, which has COLAs. Kentucky retired teachers would be among the few Americans without a defined benefit plan that adjusts for the cost of living.

Current Workers

The report calls for freezing current workers’ pension benefits and moving them to inferior 401k-type defined contribution (DC) plans for the remainder of their careers. PFM also proposes a buyout to encourage moving workers fully to DC plans. Employees in the KRS cash balance plan created in 2013 would have their credits in this hybrid plan transferred to DC account balances.

PFM would move the goalposts for current workers to receive what remains of their defined benefit plans by raising the retirement age for unreduced benefits to age 65 for non-hazardous workers and teachers and to 60 for hazardous duty employees like firefighters and police officers. The state’s consultant would also eliminate provisions for current teachers including use of sick time towards service credit, a higher factor to calculate benefits for those with over 30 years of service and a method of using the highest 3 years of salary for those over age 55 with 27 years of service.

Cuts to current workers raise serious questions about legality, as they do for retirees, and big problems with how current workers will respond, including the threat that many will choose to retire before changes go into effect — causing a drain on the retirement systems and a workforce crisis for the state and school systems.

New Employees

For new employees, PFM would move everyone into inefficient 401k-type DC plans. As we show in our recent report, such a move will dramatically reduce the benefits new workers receive for a cost that is comparable to the existing defined benefit plans. Workers in DC plans receive benefits 30 to 48 percent smaller for the same upfront cost.

PFM even recommends moving new teachers into DC plans and Social Security. That will increase costs for employers, as PFM itself admits on page 16 of its report. The current employer cost of the pension plan for teachers is 5.84 percent of pay. Social Security will cost 6.2 percent of pay, on top of which employers will make a match to a DC account of up to 5 percent of pay under PFM’s proposal. So for more employer cost, teachers will get a much smaller benefit. PFM justifies this in part by saying school boards should pick up the cost of Social Security, not the state, continuing the trend of shifting the cost of education from the state to the local level.

In making these changes, PFM ignores the added costs associated with closing the existing plans and moving to 401ks. Closed plans are no longer balanced by workers of different ages, forcing plans to take on more conservative investment portfolios. That will lower rates of return, making it more expensive to pay down existing liabilities over the coming decades. As we review here, 14 states have considered such a switch and found that closing plans and moving to 401k-type DC plans increase the costs of paying down legacy debts.

On top of the pension benefit cuts above, PFM also recommends cutting retiree medical benefits by 25 percent.

As a whole, PFM’s recommendations are a drastic and one-sided approach to addressing the state’s pension liabilities. They put the blame and responsibility entirely on retirees, current employees and future workers. Nowhere in the report does PFM look at revenue options that would help Kentucky pay down its liabilities over time while protecting the remainder of our budget and safeguarding our ability to attract a skilled workforce.

 

 

10 Responses to “PFM Report Uses Exaggerated Claims to Justify Harsh, Counterproductive Cuts”

  1. Sue Ramsey says:

    They need to start calculating how much the state will spend on numerous and protracted legal battles that will definitely process if many of these recommendations are accepted. By refusing to revise the tax code before taking on the pension crisis, they clearly showed that it’s never been about replacing the dollars that were misappropriated by the state, it’s about their ability to be reelected. They have done the easy math that says there are more taxpayers than state employees, county and city employees, teachers, police officers and first responders, both current and active. They’re in for a real shock because we are a politically involved group who frequent the voting booth at every opportunity, and we and our families look forward to showing our displeasure at their decision to put the onus for fixing our pensions on those who were in no way to blame for the situation, those who had their statutory share withheld from every pay check. We spent our careers serving the public, and we didn’t grow wealthy in doing so. The politicians don’t realize how much they need career employees who hang in there and keep the government functioning while the figure heads come and go. They are in for a rude awakening when they try it without a dedicated workforce.

  2. Lisa Sears says:

    I have given the last 24 years of my life to educating students in Kentucky. I have spent thousands of dollars of my own money to provide supplies and clothing for the students in my classroom. I am sickened and heartbroken that over the last several years, our retirement system has been slipping away with no one looking out for the future of teachers in Kentucky. I should not be punished because the people with the power to control our retirement didn’t do their jobs! SAVE OUR STATE RETIREMENT FOR TEACHERS WITHOUT PUNISHING US!

  3. Bill Sullender says:

    To whom it may concern:
    I just read about the proposed destruction of our State pension plan(s). As most workers from other industries have endured such injustices as,
    Airlines, railroads and many other companies, it’s an apparent epidemic created by bankers and more importantly
    State government officials. Their inability to deliver what was promised, the carelessness of not applying minimum
    funding requirements, and total disregard of the effects of senior workers is a travesty of justice, along with robbing the till
    along the way. The arrogance and incompetence is appalling. We hope you find a better and faster solution to the quagmire
    you’ve created, because you will encounter monumental problems that you couldn’t fathom. Lastly, it’s the worker who is blamed
    and not the perpetrators. That is a pitiful shame.

  4. Bart Bredar says:

    As teachers we are by nature nurturing and caring people. We take from ourselves in order to help our students. We accept district pay cuts and increased demands because we would rather do more and take less so the children do not suffer. While the banks received their bailout I struggled to pay my mortgage each month. I do not like that I struggle to make ends meet but I accept the fact that a teacher is never going to live too comfortably. However, enough is enough if we walk blindly into the night and roll over, like we often do, then shame on us. It is time for teachers to get a backbone and stand united.

  5. BillTurner says:

    not good the future of Public Education in KY-Our Commonwealth is better than this -I don’t know much about PFM but I know KY educators have worked very hard to improve education and it’s image without help from our legislators or current administration -notice I didn’t name names former home states…teachers past present and future have earned and deserve better1

  6. BillTurner says:

    Not good for the future

    or former home states

  7. Jane H Humphrey says:

    Thank you for this perspective. This sheds some light on the outlandish suggestions to solve this crisis.

  8. Beth McCord says:

    Please take this serious. Many jobs will be effected but most of all the children will feel this issue. Teachers are hard workers who work more than 40 hours a week and hours during the summer. We go above and beyond duties and provide more for these children than just teaching. We are mothers, care givers, doctors; we provide food, clothing, etc. and more. If the retired age is 65, my question is, who would be physically able to properly care for these children and be the inspiration they need. My job is very physical working with younger students and those with special needs. We come to school sick because we care for our students and we do not want them to miss anything when we miss. We want all students to succeed to the best of their ability. OUr sick days are earned. Please consider our requests and do not change the law to this!!!

  9. Mark Rathbun says:

    I have worked in education for the past 23 years and invested that time and energy in our students and my family’s future as well. The way things are right now, I could retire in 4 years, but with the proposed plan as explained above, I would have to work for another 18 years before retiring. This would be almost like starting over. In a way, it would be worse than starting over because I could have invested the last 23 years of my life securing a more stable future in a much higher paying career. I feel that I have invested a great deal of my life into working for what I thought would be a secure future. If something like this were to pass, it would be like stealing from people who have worked so hard for what they were promised would be there after their 27 years of hard work, loyalty, and dedication to making the world a better place. I do know one thing for sure. If these changes are put into place, there will be very few people willing to choose to become teachers. This will have a devastating effect on our children and society as a whole. Please help to keep our retirement the way it is now, not only for the people who have worked so hard to reach that goal, but also for the future of all citizens of Kentucky.

  10. Deborah Drane says:

    The bulk of our family income is my retirement. I am 68; my spouse, 70. I cannot collect ha social security if he predecessors me, and, although I was fully vested is social security, I collect only 40% . Now, our monthly benefits are challenged. What happened to the” we’ll refund what we borrowed”, legislators??? Has your income been challenged? COLA’s taken away??? How can we possibly attract good teacher candidates with our retirement system in chaos???