Kentucky teachers’ pension work group sends final report on possible system solutions to new governor

The work group studying the Kentucky Teachers’ Retirement System (KTRS) in order to suggest changes to ensure the system’s solvency has completed its work and sent a final report to new Governor Matt Bevin ahead of the 2016 session.

The 23-member panel put together by former Gov. Steve Beshear, which included Kentucky Chamber President and CEO Dave Adkisson, completed its final meeting on Dec. 1 with discussion of potential solutions that could be considered by the General Assembly and governor. The report from the group was later finalized after changes and approval from the group.

In the final report, two solid recommendations are put forth with a caveat stating that the governor and General Assembly will have to make the tough decisions to shore up the system.

“While it was not possible to reach consensus around a single specific solution, common ground was found, and it is reasonable to expect that a solution can be identified,” the report reads.

The two specific recommendations laid out in the report included:

• The special appropriation and debt service savings, commonly known as green box and yellow box dollars, stay with KTRS to help address the unfunded liability in the pension fund
• KTRS and their actuary, Cavanaugh Macdonald, prepare very through projections and adjustment impacts as contribution and benefit adjustments become clearer in the coming weeks and months

As for the rest of the 18-page report, the group provides what they refer to as a “road map” to be used when crafting a solution to the system’s woes.

Included in the components of a comprehensive solution is information pertaining to:

• Increased contribution rates, which the report states could come from “the employer (the state), employees (teachers), pension obligation bonds, and/or other revenue producing measures.”
• Benefit adjustments for future teachers as well as examining benefit adjustments outside the inviolable contract for current teachers.
• And information relating to changing the system from a defined benefit plan to a 401k style defined contribution plan.

Other information discussed by the group over six months of work and a variety of options laid out by the group’s consultant is also included in the final report. Get an overview of that information here.

Adkisson served on the panel (as the only business representative in the group) and consistently pushed for a “shared responsibility” approach, i.e. a package that would both increase the amount of funding to the system in the coming years but would be balanced with a set of restructured benefits – mostly for future teachers – to sustain the system in the future.

“While I hoped to see a complete package come out of the task force, the list of restructuring and payment options was probably the most we could expect from this particular exercise. There are on-going behind-the-scene deliberations that will hopefully lead to a complete package before the General Assembly convenes in January,” Adkisson said.

As news that no action on the pension front in the next legislative session could lead to more credit downgrading from rating agencies, Adkisson stressed that something must be done to ensure the solvency of the pension systems right away.

“This critical issue must be addressed in the 2016 session. No delays. We’ve been told by bond experts that the rating agencies will likely be unforgiving if Kentucky doesn’t address its pension problems in this session,” Adkisson said. “Having a new governor and having legislative elections in November, 2016, will not impress the rating agencies if we don’t take action in this General Assembly.  And at the end of the session, it won’t matter if Republicans and Democrats, House and Senate, Governor and Legislature agree on a package; the bottom line question is: will the package satisfy the rating agencies that Kentucky has the discipline to dig itself out of its hole?”

Adkisson also pointed to the changes in life expectancy and other factors since the system was created, a factor contributing to the underfunding of the system as retirees are living longer and receiving benefit checks for many more years than expected while no other adjustments are made to account for this.

“The average adult lives 16 years longer than adults lived in 1940 when KTRS was created.   The system cannot sustain the weight of paying life-time benefits without significant restructuring,” Adkisson said.

The 2016 legislative session begins in January where the General Assembly and new governor will be expected to craft a two-year budget, which will have to include some funding adjustments for KTRS and the Kentucky Retirement System (KRS).

The Kentucky Chamber’s Bottom Line will continue to report on the pension issues as well as legislative action.