Wages & Benefits - Pension Information - Q & A Regarding Teacher Pension Fund
KEA is urging a solution to KTRS’ long-term funding problems. KTRS staff has prepared a question and answer document that explains where the funding issues came from and possible solutions.
Download PDF document Questions and Answers Regarding the Teachers’ Pension Fund here.
QUESTION 1: Wasn’t the funding plan proposed in 2015 just a short-term bond fix? Won’t we be right back where we are now in just 8 years?
The bond was one part of a comprehensive plan to achieve full funding of the Teachers’ Pension Fund contained in House Bill 4 (2015). The plan included bonding up to $3.3 billion. This immediate cash infusion would have allowed the Commonwealth to build up to full funding over eight years. The bond would also have reduced the money needed in future years by approximately $200 million annually.
QUESTION 2: Is there really enough money in the existing state budget to pay the debt service on the bonds that would have been issued if HB 4 had passed? Wouldn’t future state budgets need to have more money to cover those bonds?
House Bill 4 would have “repurposed” two revenue streams already in the budget to pay for the cost of the bond. These two revenue streams were enough to pay the full cost of a bond up to $3.3 billion. No additional funds would ever have been required to pay for the bond.
QUESTION 3: What did the Governor’s Office of Financial Management say about issuing a bond this big?
That office said that a $3.3 billion bond might be issued in three phases, one of $1.5 billion (within 6-9 months after passage of HB 4), a second of $1.2 billion (4-6 months after the first), and a final for the balance within the following 6 months. This schedule would have worked well under HB 4. Some investment banks believe the Commonwealth could sell the full $3.3 billion bond in a single issue.
QUESTION 4: Would the debt service paid on the bond make future teacher and state employee raises impossible?
Existing revenue streams in the current state budget could have handled the debt service for a $3.3 billion bond. The current state budget also contains raises for state and school employees so the two objectives, employee raises and a bond, are not incompatible (school districts, not budget dollars, often end up paying the teachers’ raises when the SEEK funding is not sufficient). Furthermore, the bond would help stabilize the state’s contribution rate for the pension fund, thus freeing up funds for future raises and other purposes.
QUESTION 5: Isn’t the bond new debt? Isn’t the state’s debt already too high?
The unfunded liability of the Teachers’ Pension Fund is already a liability of the Commonwealth that must be paid, just as any new bonds must be paid. The bond does not create a new liability; rather, it refinances a portion of an existing liability. Bond rating agencies say it is critical for the state to address both types of liabilities. The pension liability, growing at 7.5% annually, could be refinanced at the historically low interest rates available today.
QUESTION 6: Would issuing this bond hurt Kentucky’s credit rating?
States’ credit worthiness is rated by bond rating agencies. Those agencies are concerned about pension systems’ unfunded liability as well as outstanding state debt through bonds. Bond rating agencies are telling the Commonwealth that it needs to address the unfunded liability of the Teachers’ Pension Fund now. The type of bonding and long-term funding plan proposed in HB 4 is the best option the state has to address the pension fund’s liabilities. Kentucky’s credit rating has already been negatively affected due to the unfunded pension liability. Without adoption of a funding plan, the Commonwealth is facing further credit downgrades.
QUESTION 7: Is funding KTRS with bond proceeds too risky given the uncertainty in the investment market?
There is inherent risk in the stock market as exemplified by the historic market downturns in 2000 and 2008. Despite these and other market downturns, the stock market has provided solid investment returns over longer periods of time. Over the past 10 years, the return for the Standard and Poor’s 500 Stock Index was 7.9%, and over a 20-year period the return was 8.9%. KTRS’ annualized return over the last 30 years was 9.5%. The assumed rate of return on retirement system investments is 7.5%. KTRS anticipates that over the long-term, it will be able to invest the funds produced by new bonds to achieve good returns. The Commonwealth issued bonds of almost $900 million in 2010, 2011 and 2013 as part of the “Shared Responsibility” law that preserved retired teachers’ health insurance. KTRS’ investments using those bond proceeds have done very well. Even if there is a future market downturn, the infusion of bond proceeds would help KTRS ride out that downturn. Finally, there is 100% certainty that if the funding needs of the pension fund are not addressed, the problem will grow too big to address without a lot more pain for everyone.
QUESTION 8: Is this really a crisis since KTRS is projected not to run out of money for another 21 years?
The Teachers’ Pension Fund is at a tipping point. KTRS paid out $1.9 billion in retirement benefits in fiscal year 2014. KTRS has been selling assets to pay monthly retirement benefits since 2008. Since then, KTRS has sold approximately $2.1 billion in assets to pay retirement benefits. Without additional funding, the sale of retirement system assets will continue to grow, further damaging the already precarious status for the Teachers’ Pension Fund. Selling assets also means that KTRS has fewer assets to invest, compounding its funding problems. As this situation deteriorates, and the dollars needed grow larger, the Commonwealth will be unable to keep its contractual promise to Kentucky’s teachers. Every year of delay makes the problem much worse.
QUESTION 9: Haven’t KTRS’ poor investment decisions caused its funding problems?
KTRS experienced the same flat market that all investors experienced between 2000 and 2013. KTRS investments have done very well since the 2008 Great Recession. During the 2008 market decline KTRS’ investments fared much better than others’, placing KTRS in the top 10% in the nation when compared to other public pension plans. Since 2008, KTRS investments have continued their strong performance with a return of 18.1% for the 2013-14. KTRS cannot expect returns of 18.1% every year. As helpful as that 18.1% return was, it did not make up for the prior flat market and the unavailability of additional needed funding.
QUESTION 10: Are there structural problems with the retirement system that need to be addressed to fix the problem?
The normal cost to KTRS as new teachers are added, vest in benefits and retire, is less than 17% of payroll, which is a very modest amount for a retirement plan that replaces Social Security. The normal costs of KTRS have not caused its funding problems. Rather, those problems result from the unfunded liability of the Teachers’ Pension Fund. KTRS has too few assets to pay for the retirement benefits that have already been earned by active and retired teachers. Changing the benefits for new teachers will not reduce the unfunded liability by even one dollar and not address the funding issue.
QUESTION 11: Is this an issue that affects only teachers?
No. This issue affects the entire Commonwealth. Teachers’ retirement benefits serve as an excellent tool to attract and retain quality teachers in the classroom. If the Commonwealth does not address funding for the Teachers’ Pension Fund, this important employee benefit will be in jeopardy. Kentucky’s credit rating is at risk as long as the funding issue remains unresolved. If the state’s credit rating is lowered, the operations of state government will become more costly for all taxpayers.
QUESTION 12: Is there a solution other than full funding of the Teachers’ Pension Fund?
Funding is the issue. There is no other solution that will make this problem go away. Investment returns and changes in benefits for new hires will not solve this problem. It is getting worse each year that it is not addressed.
QUESTION 13: Did teachers vote against participating in Social Security?
Teachers never had the opportunity to vote for participation in Social Security. They were excluded from coverage when Social Security was established in 1936. In 1951, when the federal government allowed states to opt in to Social Security for some or all of their public employees, Kentucky chose not to cover teachers under Social Security, partly because of the added cost of coverage.
August 12, 2015