Thousands of teachers have rallied in the Kentucky Capitol in recent weeks, demanding that lawmakers fully fund their pensions. Until this week, Republican leaders have had a simple response: That’s what Gov. Matt Bevin has proposed and that’s what we did in the last state budget.
That argument was undermined Tuesday when the Senate released a two-year state budget proposal that allocated $1.1 billion less to the Teachers’ Retirement System of Kentucky than what the Republican-led House or the Republican governor had proposed.
The Senate proposed allocating $598 million to TRS in 2019 and $506 million in 2020, well below what officials with the system have said is necessary to pay off its $14.3 billion unfunded liability over the next 30 years.
“This decision to cut over $1 billion in funding over the next biennium is particularly galling because the money doesn’t seem to have gone to education elsewhere in the budget,” said Stephanie Winkler, president of the Kentucky Education Association.
Instead, the Senate would spend that money on other pension systems for state workers that are in even worse financial health. More than $800 million of the money would go to the Kentucky Employees Retirement System, which has only 14 percent of the money it needs to pay future benefits in its largest pension plan, and about $200 million would go to the State Police Retirement System, which is only 27 percent funded.
Without the extra cash, TRS is likely to experience “severe negative cash flow,” which could put constraints on how the staff sells investments, said Beau Barnes, the general counsel for TRS.
“This funding is not needed for the normal cost of the system, it’s needed to pay off the unfunded liability,” Barnes said.
If lawmakers don’t continue providing funding at the higher levels, actuaries predict TRS could go broke by 2038, he said.
Since 2004, the legislature has only provided TRS the contribution its actuaries said was necessary once, in 2016, according to an analysis by the Kentucky Center for Economic Policy. In that time period, the system went from 80.9 percent funded to its current 56.4 percent.
Lawmakers, though, said the problems facing the pension systems for state workers and police are much more immediate, suggesting the pension plans might not survive a steep stock market downturn.
“If we have a market correction, the (teachers’) system will weather that correction,” said Sen. Chris McDaniel, R-Taylor Mill. “If we have a market correction, the State Police system will become insolvent.”
When Senate President Robert Stivers was asked about why the Senate chose to decrease funding to TRS, he implied lawmakers were simply doing as teacher groups had asked.
“They have said, and go back and look at the testimony of their respective individuals, ‘we’re fine, just fund us at the required level,’” Stivers said.
There is disagreement, though, about what level of funding is required.
Stivers often argues that, unlike the other retirement systems, state law only requires the legislature to contribute an amount equal to 13.105 percent of teachers’ payroll to TRS. Since the 2006-08 budget, that amount has been lower than the total actuaries calculate is needed to fully fund the system.
“Unfortunately, that is not good enough to fund the system on an actuarially-sound basis,” Barnes said.
He and Jason Bailey, executive director of the Kentucky Center for Economic Policy, argue that the same state law Stivers is referencing also requires the legislature to make up the difference if what it contributes based on payroll doesn’t provide what actuaries say is needed to fully fund the system. TRS requested about $1.2 billion in each year of the two-year budget.
Since the legislature makes law, they can always exempt themselves from that statutory requirement in the budget bill, but they are aware the requirement exists, Bailey said. For example, the legislature provided TRS far more than 13 percent of payroll in 2016 at the behest of Bevin, a fact that has been touted throughout this year’s budget process.
“They did it in the last budget,” Bailey said. “They didn’t fund the narrow portion he’s talking about, (Stivers) funded the full ARC (annual required contribution). And he keeps pointing to that accomplishment.”
Senate Bill 1, the pension overhaul bill, contained language that would have clarified the statute and required the legislature to fund the full annual required contribution for teachers. But that bill stalled when eight Senate Republicans joined Democrats in opposition to the bill, which also cut retirement benefits for teachers and others.
On Friday, leaders of the House and Senate will begin negotiating a final version of the state budget, and funding for teacher pensions will likely be a key topic of discussion.
House Speaker Pro Tempore David Osborne, R-Prospect, said adequately funding the teacher pension system is important to House Republicans.
“It was a priority for us and its something that we remain committed to,” Osborne said.
He said Senate leaders make a valid point when they caution that the pension systems for state workers might not survive a severe market downturn and thus deserve extra funding beyond what their actuaries say is required.
“It’s not necessarily one we subscribe to, but it’s at least a valid point that they have made,” he said.