By Madelynn Coldiron
The state legislature will convene in a short, odd-year session in January, and officials who are trying to shore up the Kentucky Teachers’ Retirement System hope lawmakers will consider an option for a partial fix to reduce the system’s unfunded liability.
That’s because their proposed refinancing plan involving a pension obligation bond will be fueled only by existing dollars.
However, the option being offered by KTRS will “almost certainly” require amendment of the 2014-16 budget, for which a super-majority vote – three-fifths, or 60 percent – of lawmakers is needed, said Beau Barnes, KTRS’ deputy executive secretary of operations and general counsel.
This “does make it more difficult for passage,” said KSBA Associate Executive Director David Baird, who is among the KSBA representatives who have met with KTRS leaders to discuss the proposal. “However, because KTRS is not asking for more money – just bonding authority – there is no effect to the budget.”
With the implementation of changes by the Governmental Accounting Standards Board, the teachers’ retirement system’s unfunded liability is growing from $13.9 billion to about $22 billion, or from 51.9 percent funded to 42.38 percent.
The 2014-16 state budget directed that as debt service is retired on three outstanding bonds, that money would be maintained in future budgets to help the KTRS pension fund. By the time the bonds are paid off in 2024, that would amount to $116 million annually.
“This is much appreciated, but is far less than what is needed,” Barnes said.
The option being proposed by KTRS would take that money, and other revenue streams that are already in the budget for the pension fund, and convert them as debt service on a new, 30-year, $3.3 billion bond issue that would cover the additional funding needed to provide the full annual required contribution to the pension fund for seven years.
Barnes said the primary reason additional funding is needed to pay off the unfunded liability is the flat 13-year investment market that affected all investors.
Failure to address the problem will create what Barnes calls “negative compounding,” in which the unfunded liability continues to grow, the funded status declines and the sum needed to make the fund actuarially sound increases dramatically.
As it is, just to meet the current monthly retirement payroll, KTRS will have to sell some of its assets this year. That, in turn, leaves less money to invest.
Baird called the pension obligation bond plan “a sound and workable solution.” The association’s board of directors will be asked to endorse it as part of its 2015 legislative platform.
Tom Shelton, chairman of the KTRS Board, believes this option “is the right thing to do.”
“We want to make sure we work toward having a pension fund that’s actuarially sound and when this amount of money is owed to the system, it puts us in a precarious situation for the future. So we’d like to see this happen and to make sure we receive the required annual contribution from here on out as well so we don’t end up back in this situation,” said Shelton, who also is superintendent of Fayette County Schools.
Shelton said he knows lawmakers are hesitant to take on additional debt, “but I don’t see it as additional debt because they already owe the debt – they owe it to the teachers and the members of the teachers’ retirement system, so it’s really just restructuring the debt and allowing the system to take advantage of the funds to maintain a better financial status while making that commitment for members of the system.”
Meetings are continuing among KTRS staff and lawmakers and their staff on finding a long-term funding solution. Barnes described the meetings as “very positive.”
Shelton said a long-term solution could rest with an idea being discussed by the Council for Better Education, which he heads. The group is researching a new funding model for education, he said, and is looking at funding the pension, as well as health and life insurance benefits, as part of the cost of education. Those benefits now are allocated separately from the basic state funding formula.
“It can’t be seen as a separate item even though it’s managed at the state level. It has to be seen as a part of the cost of doing business for education because our pension benefits that retirees receive are really just deferred compensation that they didn’t earn while they were teaching and retirement is just a reward for a life of service in teaching,” Shelton said.
School board members have a stake in the health of KTRS
Local school board members should be concerned about the unfunded liability in the Kentucky Teachers Retirement System because of its potential effect on the work force of their school district, Campbell County school board Chairwoman Janis Winbigler said. “I don’t necessarily think that’s one of the issues that has been on their radar, because it’s more of a state issue than a local issue,” she said.
Winbigler’s own concern about the system is both professional and personal, as a longtime educator who is currently director of student services for Bellevue Independent Schools.
“It’s been one of the biggest benefits across the state for teachers, just to have that secure retirement system – and it’s a good retirement system. And it’s going to be more and more difficult – salaries have been pretty flat – without the good retirement system in place, to attract individuals to the education field,” she said.
The more experienced teachers are concerned and keeping a closer eye on the situation, but, Winbigler said, “I even have individuals who are thinking about going into education who have had an eye on it and making the comment that they’re unsure because they’re not sure about the retirement.”
Teachers count on their pension, because they do not receive Social Security, a fact that the public in general does not understand, she said, and when they do, “they’re shocked.”
Winbigler said she also is worried as an educator. “There almost has to be changes to the retirement system and it concerns me not knowing what those changes may be for me, eventually, as a retiree or even now in terms of attracting young individuals into the profession,” she said.