Part of Gov. Matt Bevin’s controversial proposal to reshape Kentucky’s public retirement systems would require school teachers and state and local government employees to pay an additional 3 percent of their salaries into their retiree health insurance funds.
It’s not clear why.
Bevin’s plan would amount to a 3 percent pay cut for nearly 208,000 public employees, most of whose wages have been stagnant for years. It would shift $243 million from their paychecks in 2018 into insurance funds that are maintained by the Teachers’ Retirement System of Kentucky and the Kentucky Retirement Systems, according to an analysis by the Kentucky Center for Economic Policy in Berea.
But unlike the beleaguered pension funds maintained by TRS and KRS, those insurance funds are steadily growing year by year.
A decade ago, new federal accounting standards pressured the states to “pre-pay” their retiree health insurance funds rather than stick with the “pay-as-you-go” model, where today’s workers covered health care costs for today’s retirees. Since then, public employees have contributed part of their salaries toward their retiree health insurance funds, which invested the fast-swelling assets for those employees’ future use.
Kentucky teachers, for example, currently give 3.75 percent of their pay, which is matched by 3 percent from their school districts. After retirement, those employees also are expected to contribute toward their insurance premiums.
This infusion of cash has made a big impact. As of 2016, the TRS insurance fund held $739 million in assets for retired teachers, up from $638 million in 2015. Elsewhere in Frankfort, KRS held $4.6 billion in assets in its insurance fund for state and local government retirees, up from $4.4 billion in 2015.
“We’re very happy with where we are,” said Beau Barnes, general counsel for TRS. “This plan has been hugely successful. We are cash-flow positive.”
So why lift even more money from public employees’ paychecks?
In an interview Tuesday with the Kentucky Chamber of Commerce, which has endorsed Bevin’s pension proposal, the Republican governor said he wanted public employees to pay “a tiny token amount” toward the cost of their health coverage in retirement.
“We’re asking them simply to contribute 3 percent,” Bevin said in the interview.
“Health care to retirees has come at no cost to them,” Bevin said. “And this is simply saying that we’re asking participants to put 3 percent — active participants to put 3 percent toward their existing health care, knowing that when they retire, this is a benefit that they’ll continue to get that’s not even accounted for actuarially. So there’s huge costs to the state, and this is a tiny token amount that people are being asked to exchange for something of tremendous value to them.”
Public employees this week said the governor’s explanation puzzled them because they already do, in fact, pay toward their retiree health care, and also, they consider 3 percent of their salary more than “a tiny token amount.” For a school teacher, that deduction could amount to $40,000 in paycheck withholding over 27 years.
“There is no actual justification for doing this other than — forgive me — trying to appease some carpetbagger knothead from Wall Street who wants to take still more money away from workers,” said David Smith, executive director of the Kentucky Association of State Employees.
Smith said Kentucky’s public workers have lived on essentially the same wages for years while their paycheck deductions and the cost of living has risen. The General Assembly regularly raids the state employees’ health insurance fund to balance the state budget — it took $125 million for Fiscal Year 2018 to pay for pension obligations — and now the governor wants them to pay even more toward their retiree health care, he said.
“It doesn’t make any logical sense,” Smith said. “It’s almost as if the politicians just want to make it so miserable for people to work for the government that nobody will do it anymore and, as a result, public services will be terrible. That’s about where we are now. I hear from single mothers who say, ‘Dave, I’m going to have to seek assistance from the same state social services office I work in.’ It’s humiliating for them.”
In a prepared statement this week, Bevin’s office said the retiree insurance funds at TRS and KRS still face unfunded liabilities in the billions of dollars, which larger contributions would help reduce.
“Recently, the focus has been on the precarious financial pension situation,” Bevin spokeswoman Amanda Stamper said. “However, the retiree health care plans are underfunded as well — nearly $6 billion. The 3 percent of salary contribution will shore up the health care plans that provide health benefits for life beginning at retirement.”
“With ever-increasing health care costs and premiums for those in the private sector, this investment should provide current and future teachers and public servants peace of mind. Rather than facing uncertainty, they will know their future health care plan is being put on solid ground to cover their health benefits at retirement,” Stamper said.
But Jason Bailey, who has studied the numbers behind Bevin’s public pension proposal for the Kentucky Center for Economic Policy, said the governor’s call for additional paycheck withholding is unnecessary. Both of the retiree insurance funds, at TRS and KRS, are gaining ground as intended, Bailey said. By the time today’s workers retire, their contributions will have adequately filled the funds’ coffers, he said.
“The idea that we’ve got to get to 100 percent funding levels with everything right now, that’s just not realistic,” Bailey said. “That’s not how it works. Honestly, this hasn’t even been a topic of conversation as we’ve been discussing pensions this year. I don’t know where it came from.”
Groups representing public workers say they have their own suspicions. One fear is that once the state government has created a new funding stream of roughly $250 million a year, wrung from workers’ salaries, the General Assembly will be able to redirect that for other purposes as it sees fit, much as lawmakers already swipe cash from the state employees’ health insurance fund, land conservation funds and other sources in order to balance the state budget every two years.
There also is concern that lawmakers will try to quietly shift the money from retiree insurance funds toward pension funds, making it a “back door” violation of the state’s inviolable contract that limits how much public employees can be asked to contribute toward pensions, said Jim Carroll, spokesman for the advocacy group Kentucky Government Retirees. State workers, for example, contribute 5 percent of their pay toward their pensions.
“I’d like for our elected leaders to come out and clearly state a reason for this,” Carroll said. “Most state employees haven’t had a pay raise since 2007, not even counting the unpaid furloughs they’ve had to take. If they’re supposed to take a pay cut now, someone needs to make the case for it.”