Pension reform discussions may sound to laypeople as if they’re being conducted in a foreign language, but there is one message for which school board members need no translation:
The proposed recommendations from the PFM group being considered by state lawmakers have the potential for putting school district budgets into a tailspin, disrupting the continuity of learning in the classroom, and exacerbating the growing inequity between school districts with resources and those that have reached the end of theirs.
Beau Barnes, deputy executive secretary and general counsel of TRS,
speaks at South Warren High School last month during a discussion
on pension reform. (Photo courtesy of Warren County Schools)
What follows is a snapshot of the major recommendations affecting school districts, and the potential damage. At this stage, these are recommendations that may or may not make it into a pension reform bill.
Recommendation: Place new teacher hires in a combination of Social Security and a 401(k)-type retirement plan.
What board teams need to know:
Fiscal: If this were enacted, school districts may have to pay the 6.2 percent employer contribution for Social Security; the PFM report builds a case for that. The minimum “employer contribution” to the 401(k) would be 2 percent, but capped at 5 percent; the consultant’s report does not specify what employer makes this payment – the state or the local district. The state currently pays the employer contribution to the teachers’ system on behalf of local school districts.
Workplace: Without the prospect of a defined-benefit pension, which traditionally has offset the attraction of private-sector jobs, fewer young people may go into teaching, potentially making worse a shortage in Kentucky. Districts with fewer resources or in geographically isolated areas are already having a tough time attracting teachers.
Recommendation:
Current teachers would stay in the Teachers’ Retirement System, but would not be able to retire with full benefits until 65. The retirement age for all other school system employees also would be set at 65.
What board teams need to know:
Like switching from the current pension system for new hires, this change carries with it the danger of making the teaching field less attractive and makes it even harder for districts to fill positions like bus driver, custodian or cafeteria worker.
The effect on morale – i.e., working past the point of burnout in a stressful job – can only be speculated on at this point.
Recommendation:
Stop permitting teachers to apply accrued sick leave toward their retirement benefit.
What board teams need to know:
The prospect of losing accrued sick leave could see teachers currently eligible to retire start heading for the hills, wanting to apply that time toward their pension benefit while it still exists. Districts may find it hard to replace these experienced educators, especially in subject areas like math, science and special education; the exodus would also hit harder in poorer districts.
In theory, the change also would see teachers taking sick time when they might not have before, putting a greater burden on districts to place already-hard-to-find substitutes. This also comes at an educational cost to students by creating a potential lack of continuity in the classroom.
Recommendation:
Current employees in the County Employees Retirement System, which covers school district classified employees, would be shifted to a 401(k)-style retirement plan with the same parameters outlined for new teachers, with their current CERS service frozen.
What board teams need to know:
Fiscal: If this is enacted, school districts would make the employer contribution to the new 401(k)s, as they currently do for the CERS. However, the PFM report notes that employers would still have to continue some form of payment to reduce the CERS’ existing unfunded liability: “It is also essential to recognize that the employers and departments that have participated in the plans share in responsibility for the unfunded liability for actives and retirees based on past service.”
Workplace: A pension makes the jobs of classroom aide, cafeteria worker and bus driver more attractive, offsetting the low salaries. A 401(k) provides a smaller and riskier benefit than a pension. This could hurt recruitment for these positions, which many districts already struggle to fill.
Recommendation:
Employees in the CERS system would not be able to apply unused sick leave to increase pension benefits. However, the report recommends that their sick leave instead be cashed out upon retirement at 25 percent of then-current salary rates.
What board teams need to know:
Local school districts would be responsible for this payout.
Recommendation:
Do not separate the County Employees Retirement System, which covers school district classified employees, from the Kentucky Retirement Systems.
What board teams need to know:
CERS is better funded than the state employee retirement system because school districts and local governments by law have been making the required contributions over the years. CERS also has the largest portion of assets in the KRS pension funds, and school district employees make up a majority – 52 percent – of the CERS workforce. It’s hoped that a separate system would translate into greater transparency, stability and higher investment returns over the long term.
Recommendation:
Switch funding approaches for employer contributions to all systems from the current percentage of payroll method to a level-dollar approach.
What board teams need to know:
This is a complicated concept, but the bottom line is a) few states use the level-dollar approach; and b) it would immediately increase school districts’ contribution costs toward employee retirement. Districts now pay based on the percentage of payroll system, which assumes payroll will grow over time. A level-dollar approach is like a home mortgage: payments remain the same year after year, payroll growth notwithstanding.
The level-dollar approach may offer stability and predictability from a budgeting standpoint. However, the sudden switch would have districts scrambling because the contribution amount will be much larger than what districts are now paying, at rates that would likely exceed the school board’s ability to increase revenues in light of tax rate limitations.
Equity gap among districts likely to grow larger
The thread running through some of the major recommendations for pension reform is a shift in the financial burden from the state to local school districts. The immediate impact would be felt on school system budgets and workforce supply – with attendant potential fallout in services to students.
But the overarching scenario further exacerbates the imbalance between the school districts that have more local resources to fall back on and those that do not.
“Right now we’ve already got a situation where we know that there are concerns about equity. For districts that are already struggling, any kind of change in the pension system is going to require more money to come from general funds, and is just going to widen that gap and inequities among districts,” said Pendleton County Schools Superintendent Dr. Anthony Strong, who cautioned that the outcome of pension reform is still unknown. Strong is president of the Council for Better Education, a group that in its earliest incarnation brought the lawsuit that resulted in the 1990 Kentucky Education Reform Act, which was based on addressing inherent fiscal inequities among school systems and the education they were able to provide their students.
The funding equity issue also is on the mind of school board members, said KSBA Governmental Relations Director Eric Kennedy. “The inequity across districts was interwoven” through many comments the association received in this year’s legislative survey to members, he said.
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