A Pension Plan Update

As many of you know, on Wednesday morning, Governor Bevin and the legislative leaders released their proposed changes to the state’s pension plan.  In order to keep you informed, here is a summary of the highlights of that plan.  I am showing only the changes for retired teachers and not for other retirement programs (police, legislators, etc.)  None of the changes would go into effect until July 1, 2018.

Let me say up front that this is my interpretation of the bullet points that the governor released.  By this, I mean that I haven’t had a chance to discuss this with the other officers of the CCRTA or KRTA.  So any errors or misinterpretations are solely mine.  The governor has not released a lot of details yet but has released a list of bullet points concerning the changes.

Let’s do this in a question-and-answer format:

 Q.   I am a retired teacher under the TRS (formally KTRS) system.  What changes can I expect?

A.  Under the plan, you will not receive the 1.5% cost-of-living adjustments (COLAs) for the next 5 years.  The plan doesn’t say what happens after that period, although it’s reasonable to assume that it will depend upon the state’s finances at that time.  This means that whatever monthly check amount you are receiving now, you will receive for the next 5 years.  There are no other proposed changes in the plan that will affect currently retired teachers.

     Put another way, your check in 5 years will be 7.73% (compounded) less than it would be without the change.  In addition, you have incurred 5 years of lowered income.

     Although there will be considerable and valid opposition to the change, some will view this as a “win” for currently retired teachers, when considering the alternative.  (The pension consultant had recommended reducing current pension checks by 0% to 25%, depending on the date of retirement.  This recommendation was not accepted.)

     However, this is not an insignificant change.  Over a 20-year retirement period, it amounts to a little over a year-and-a-half’s income (1.54 years to be exact).  For example, if your TRS pension is $30,000 per year, your total income over the 20-year retirement period would be $704,116 under the current plan (with continual 1.5% increases).  This would be reduced to $657,971 under the proposed plan, or a reduction of $46,145.  In other words, a reduction that is equal to 1.54 years of your current pension.  (The 1.54 years would hold true for a 20-year period regardless of your current pension level.)

Q.  I have not yet retired and am currently teaching in the TRS system.  What changes can I expect?

A.  There are quite a few changes:

·        On the plus side, you will remain in the defined-benefit plan that is currently in effect.  The defined-benefit plan remains open to current teachers/university members until your earn full unreduced retirement eligibility (27 years of service or age 60)

·        On the negative side, current teachers who have met the threshold (27 years of service or age 60) by July 1, 2018, will have the option to continue to accrue service credit in their defined-benefit plan for up to 3 additional years or move into a defined-contribution plan.  For example, if you have 27 or more years of service by July 1, 2018, you may work for 3 more years under the defined-benefit plan, giving you a total of 30 years.  After that, you must move into a defined-contribution plan.  In other words, the days of retiring with 35 or 40 years of service credit are nearing an end.  The three-year period was placed into the plan as a transition period in order to avoid a surge of retirements in 2018.

·        If you retire before June 30, 2023, you may use the average of your highest 3 years’ salary to compute your pension benefits.  If you retire after June 30, 2023, you must use the average of your highest 5 years.

·        Future retirees will not receive the 1.5% COLA for the first 5 years of their retirement.

·        In a very controversial clause, three percent (3%) of the employee’s salary will be used as an additional contribution to fund the retirement health-care program.  This results in a de facto 3% pay cut for current teachers.  (The question has arisen:  Why should current employees be required to sacrifice and pay for a pension crisis that was caused by the state failing to make its contributions over an 8-year period?  It’s a good question.)

·        Sick leave balances are frozen as of July 1, 2018 for university members who receive service credit for accumulated sick leave.  In other words, a cap is being placed on the amount of sick leave that may be counted for service credit.

·        Neither current nor future elementary/secondary teachers will be covered by Social Security.

·        There is no change to the full retirement age.  (The pension consultant had recommended requiring everyone to work until age 65.  That recommendation was not accepted.)

·        Current teachers/university members with less than 5 years of service in the current defined-benefit plan will have the option to transfer to the defined-contribution plan.  This transfer is not required but is merely an option.

Q.  I am a college senior and will begin my teaching career after July 1, 2018.  What changes are in store for me?

A.  A very large one.  Teachers hired after July 1, 2018 will enroll in a defined-contribution plan (similar to a 401-K plan) with the option to maximize 18% of their salary.  The employee contribution will be 9% (required) with the option to invest an additional 3%.  The employer contribution will be 6%, with the state’s portion being 4% and the local school district employer’s contribution at 2%.  (The districts do not currently contribute toward retirement benefits.)

Q.  The state will not require elementary/secondary teachers to be covered by Social Security.  Why not?

A.  The governor said the teachers’ union leaders asked him to not require Social Security coverage.  A compelling argument can be made that the state did not want to pay the 6.2% employer’s match for Social Security purposes.

Q.  For 8 consecutive years, the Commonwealth did not make contributions into the retirement fund.  Can we trust that it will do it now?

A.  The proposed plan will require the state to make the actuarial required contribution (ARC) in full for each year.  This is probably a minimum of $2 billion per year.  For comparison purposes, last year’s contribution was slightly less than $1 billion.  If all goes according to plan, the plan will be fully funded after 30 years.

Q.  Is the plan a “done-deal”?

A.  No, this is simply an agreement between the governor and legislative leaders.  A special session of the legislature will be called during the next few weeks.  The state’s number-crunchers will need to calculate the total cost of the plan before a vote can be taken.  There is opposition to the plan, so it is reasonable to expect that some changes will be made during the special session.

A final personal note:  This email is going out to over 600 retired teachers in Calloway County and another 20 or so in surrounding counties.  While I would normally be glad to answer questions, I have a busy week or two coming up and just won’t have time to respond to a flood of questions.  Besides, this is about all that I know at the moment.  Details of the plan will be coming out soon and there will be an ebb-and-flow of proposed changes, so let’s watch the news and stay involved with our legislators.  Our local legislators have been supportive of us so far, so please thank them for their efforts and ask them to continue to represent us during the upcoming session.

Our CCRTA leaders will pass along any major developments as we learn about them.  I hope this information helps.  Have a great week!