Bluegrass Beacon: Pension contract inviolable, not inflexible

Legislators campaigning to hold on to their seats may be jittery about dealing with controversial pension reform, but the problems plaguing the state’s retirement systems don’t hibernate just because there’s an election.

Despite record amounts of funding in recent years, the ailing Teachers’ Retirement System (TRS) is saddled with $14.5 billion worth of liabilities, remains under 60% funded and had a negative cash flow last year of about $300 million.

Some critical steps to improve the TRS – particularly in areas of widespread agreement – can and should be taken during the 2020 legislative session.

It’s generally accepted that while benefits already earned should be funded at the levels promised, the inviolable contract between the state and its teachers doesn’t prevent future changes. For instance, this contract doesn’t include a provision allowing retiring teachers to spike their pensions with unused sick days in the future just because it’s been past practice.

Some of the changes made earlier this century – when the number of unused sick days which can be accrued during an entire career and applied to beneficiaries’ final year of compensation was reduced from 400 to 300 without any successful legal action stopping it – suggests that Kentucky’s inviolable contract with teachers doesn’t legally prevent modifications to future benefits. In fact, there can be no guarantee in defined benefit pension systems like the TRS that future benefit levels will remain as high as past ones. After all, how can future benefit levels be promised before actuaries even have the chance to look at how the system performed the previous year in order to determine affordable benefits while avoiding harmful liabilities down the road?

The primary reason Kentucky faces a huge $48 billion pension liability is because benefits have been increased and then applied to previous years when the systems originally funded benefits at an often much-lower level.

This problem is compounded when workers and teachers are promised that future benefits will remain at the high levels of the past.

While this practice makes everyone feel warm and fuzzy – like we’re doing something to help our teachers – the problem is that such promises are made before it’s even known whether TRS can actually afford to keep them at those higher levels. Not being able to fund them ultimately weakens the system, which certainly doesn't help beneficiaries or retirees.

While many Kentucky teachers retire with similar salaries after 27 years, their pension payments vastly differ because of the sick-day policy. Not only do teachers upon retirement receive compensation for 30% of the value of their unused sick days over a career, but that same amount is applied to the salary of the final year they were in the classroom. This practice spikes some pensions by as much as $20,000 annually since retirement payments are determined using the three years in which teachers’ salaries were the highest.

Actuaries cannot possibly know ahead of time how much money will be needed to cover these various accounts.

The burden on TRS grows as retirees increasingly live longer and collect benefits enhanced for a lifetime.

Even $5,000 in additional pension compensation each year for a teacher who retires at 55 years of age and lives until 80 will cost the state an additional $125,000 for which no additional contributions or investments were made into the system to help fund those added benefits. Nothing in the state’s inviolable contract prevents a more reasonable and less-costly approach that still provides a reward for not using sick days while relieving strain on the system.

Both sides of the political aisle should be able to agree – even in an election year – that it’s sensible to offer a generous payment to retiring teachers for not using these days while ending the irrational and costly practice of allowing such compensation to spike pension payments forever.

Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com and @bipps on Twitter.

Editor’s note: The Bluegrass Beacon is a weekly syndicated newspaper column posted on the Bluegrass Institute’s website after being released to and published by newspapers statewide.