MURRAY — The meeting room at the Calloway County Public Library was nearly filled to capacity Wednesday evening as local teachers met to gain more insight into proposed changes to the state’s ailing pension system.
Larry Guin, a retired finance professor who taught at Murray State University and member of the Calloway County Retired Teacher Association, explained what changes had been proposed in a plan to repair the state’s underfunded pension system. This meant expanding on some bullet points from a 500-page bill, the details of which had been released for public consumption Friday.
Guin explained the changes and how they would impact three demographics within the state’s education community — current retired teachers, current educators and those who are just about to enter the field of education. Guin began with discussing the various entities that comprise the Kentucky pension system, noting that the system handling teacher’s pensions, Teachers Retirement System of Kentucky, was among the best managed within the state.
“In Kentucky there are eight pensions systems, the teachers are one of those eight, and it is a separate system,” Guin said. “There are also separate systems for the judiciary, there is a separate system for the legislative members and then there are five others that are kind of grouped together under this umbrella that is called Kentucky Retired Systems — and KRS does not have a sterling track record, to say the least.”
The Kentucky Employee Retirement System, or KERS, is the largest of the five pension systems under the KRS umbrella and is about three times the size of TRS. Guin said that it also has the worst track record among the various state retirement systems.
“The largest part of those five that are under that umbrella is KERS, which are most state employees, they are about three times the size of the teacher’s group that we are a part of,” Guin said. “Unfortunately, KERS is the one that has really had the worst track record of any of the pension funds, and we get confused with them all the time. KERS is currently 14 percent funded, TRS is about 54 percent funded by the same criteria. The legislative is about 85 percent funded.”
Guin said that anything below 60 percent is considered pretty sketchy, and that at 14 percent it could be considered a disaster. Guin also mention transparency at the state level, and noted that TRS, the pensions system for teachers, had been very transparent with their investments.
“You hear a lot about transparency at the state level, TRS has nothing to fear from transparency,” Guin said. “They have some of the lowest fees in the country, they are in the top 10 percent in terms of investment performance in the country. They don’t hide anything, everything is out there.
“KERS has a terrible track record on that. They hire a great deal of people outside — hedge fund managers for the most part. Not too long ago they hired a currency speculator, and what a pension fund is doing in currency speculation I have no idea, because it is about the riskiest thing out there you can invest in.”
Guin said some of the actions made by KERS are what prompt discussions about transparency.
“KERS paid $2 million as a finders fee for someone to go out and find somebody to manage that for them,” Guin said. “They paid several million then to the actual person who was going to manage it, and then they lost tens of millions of dollars before they finally got out of it.”
Guin said that all of this went on without the head of KERS disclosing to their board of directors who they were hiring, and at what cost. But Guin said TRS was not a part of that, and noted that as a point of pride.
Guin then began to break down some of the bullet points from the current bill, which is expected to be addressed in a special session before the end of the year. He began by discussing the impact on teachers that are currently retired, noting only one change.
Guin said that current retired teachers will not receive the 1.5 percent cost of living adjustments (COLAs) for the next five years. Guin said that such a change is not insignificant and that over a 20-year time period, it would amount to retired teachers giving up the equivalent of 1.5 years income.
“It doesn’t matter how much money you make or anything else,” Guin said. “If you assume a fairly typical 20-year retirement period, it would cost you about a year and a half of your pension.”
Guin said that for those currently teaching, there are quite a few changes that will be made. The first impacts length of service, with current teachers being able to remain on the defined-benefit plan until they have accumulated 27 years of service. From there, teachers would have to change over to the new defined-contribution plan, which is known as a 401(a) plan.
Guin made note that non-university members who have at least 27 years by July 1, 2018, may stay in the defined-benefit plan for up to three additional years. However, university members would not be able to utilize that transition period, and would have to change to the 401(a) program on July 1, 2018.
“Everyone is talking about a 401(k) plan, but this is not what the state is setting up. 401(k) plans are for for-profit companies,” Guin said. “A 401(a) is for nonprofit organizations, whether it be a state government or a church or whatever. They are very similar to one another but there are some differences.
“You have much less control of your money under a 401(a) than you do under a 401(k). Under a 401(k) you decide how much money you are going to contribute to it…you decide usually from a wide range of investments what you want to invest in and it is usually not mandatory, you can put nothing in it if you want. A 401(a) plan is mandatory, you have to participate in it, and you typically have a more limited range of investment options.”
Guin said that rather than having access to 14 or 15 investment funds under a 401(k), a 401(a) might provide only four or five investment funds for a retiree to invest in. Guin said this ultimately amounted to people having less control over their money.
Guin also said current teachers could expect a 3 percent pay cut. This would come in the form of a payroll reduction, which would go toward reducing the pension plan’s current shortage over a 30-year time frame.
There will also be changes made to base pay for current teachers when they retire. If a teacher is retiring before June 30, 2023, they would be allowed to use the average of their highest three year’s salary to determine their pension benefits. If retiring after that date, they would take the average from their highest five years of pay. COLAs would also be absent for the first five years of retirement for these educators as well.
Guin also mentioned changes to sick leave for current educators. For K-12 teachers, school districts would no longer be required to provide at least 10 paid sick days each year. Instead, each district can provide whatever paid or unpaid sick leave they deem appropriate. For anyone retiring after July 1, 2023, accumulated sick leave would not enhance a teacher’s pension check.
For university members who receive service credit for accumulated sick leave, those balances will be frozen as of July 1, 2018. In other words, Guin said, a cap is being placed on the amount of sick leave that can be counted for service credit, which is eventually going to zero.
Guin also noted that K-12 educators would not be required to join the Social Security program, as the state does not wish to pay the 6.2 percent employer match to the program.
For future educators who may be graduating from college to pursue a career in education, Guin noted a few changes which were large. The first is that new teachers hired after July 1, 2018, would enroll in a defined-contribution plan, which is the 401(a) plan. Through that plan, new teachers would contribute a mandatory 9 percent of their salary with the option to invest an additional 3 percent. The state would contribute 4 percent with local school districts contributing 2 percent.
Like all retirees, new hires would also not see COLAs for their first five years of retirement. But the biggest blow to new educators would come through a legal lens, with new 401(a) plan that is being discussed in the bill as being exempt from the inviolable contract.
The contract essentially says a state cannot renegotiate terms with state employees in terms of their pensions. However, Guin said the new bill specifically and clearly states that benefits under the new plan are not considered an inviolable contract. Therefore, future governors and legislators could change any benefits they choose without fear of a lawsuit.
Guin also addressed skepticism over Gov. Matt Bevin and some allegations that he is trying to get more business for his “hedge fund buddies.” Guin addressed this in a handout he offered to those in attendance on Wednesday.
“Investments for the new 401(a) plan will be managed by a new 11-member Public Employees Retirement System (PERS) board of trustees,” Guin said. “Eight of these members will be appointed by the governor, two are filled by cabinet members (Finance and Personnel) in the governor’s administration, and the last is the state’s chief accountant (Controller).
“So the governor will select 10 of the 11 members and therefore have strong control over billions of dollars in investments. This obviously raises concern over which investment firms will be chosen by the trustees to manage the money and the ties these firms have to state political leaders. Also, the bill exempts the PERS board from reporting to the Public Pension Oversight Board on investment fees and investments within the policies. When everyone is calling for more transparency, this is going in the opposite direction.”
Guin mentioned that the state is somewhat putting the cart before the horse by tackling pension reform before looking at tax reform. Guin said it would make much more sense to tackle tax reform, in which he said a series of many loopholes could be easily closed, freeing up some nearly $2 billion in new tax revenues.
“There’s certainly a better approach,” Guin said in materials he provided. “The last two pension consultants and several task forces in recent years have recommended that tax reform be enacted first, then pension reform second. It makes perfect sense to see how much revenue is available to the state after tax reform before deciding how the pension underfunding should be addressed.”
Guin said that the state’s budget is roughly $10 billion, with $2 billion needed to solve pension underfunding. Guin said that state tax loopholes are widely estimated to be between $12 and $13 billion annually. Guin said many companies within the state spend more money on lobbyists to push special interests in Frankfort than they spend on taxes.