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Pension reform framework

Pension reform framework unveiled but many questions remain

Kentucky School Advocate

November 2017

By Madelynn Coldiron

Staff writer

Attendees at the Bath County Schools annual Legislative Breakfast Oct. 18 benefited from some coincidental good timing as they watched the governor’s press conference on pension reforms.

“The devil is in the details.”

That was an often-repeated phrase after Gov. Matt Bevin and Republican legislative leaders unveiled their long-awaited pension reform framework on Oct. 18.

The framework generally maintains the defined benefit plan for current teachers up to full retirement eligibility, gives a three-year window for teachers at retirement age to remain in the current plan, sets up a defined contribution plan for new teachers and retains – until 2023 – the “high three” and accumulated sick leave in calculating pension benefits.

Attendees at the Bath County Schools annual Legislative Breakfast Oct. 18 benefited from some

coincidental good timing as they watched the governor’s press conference on pension reforms.

KSBA Governmental Relations Director Eric Kennedy continues to meet with the governor’s staff and legislators to get more of the aforementioned details, including the precise structure of the defined contribution plan envisioned for new employees.

“The pension reform framework, as released by the Governor, Senate President Stivers and Speaker Hoover, seems to have addressed some of our most significant concerns which we had discussed with the governor’s staff,” Kennedy said. “That includes not placing new teachers into Social Security, which we worried would lead to higher risk of cost increases immediately and into the future; however, many other concerns remain.”

Not included in the framework presented Oct. 18 are some of the other more controversial recommendations for the Teachers’ Retirement System in a consultant’s report released earlier, including increasing the retirement age to 65 and clawing back the past cost of living increases from current retirees.

Some of the changes compared with the consultant’s outline “may alleviate concerns about an immediate mass exodus of experienced teachers from the classroom,” Kennedy said.

However, he said, there are still several concerns:

• The amount of costs local boards may have to pick up. At this point, the governor’s framework calls for school districts to pick up 2 percent of the 6 percent employer contribution toward the new defined contribution plan for new teacher hires, with the state footing the remainder.

• The ultimate level of retirement security that will be provided to future teachers far down the road under the plan. This will impact the ability of school districts to recruit these teachers now.

To estimate the impact in these areas, Kennedy said, “we need more detailed information on the plan. Ultimately, we will have to read the actual bill itself, whenever it is released, to analyze the impact it will have on local boards.”

Some of the other stakeholder groups share KSBA’s concerns, Kennedy said, and are also concerned about the cost increases planned to fall on current employees. “For example,” he said, “the plan to require current employees to pay 3 percent more toward retiree health insurance is concerning for many groups if pay raises are not provided.”

When this issue of the Kentucky School Advocate went to press, the bill had not been released and a date for a special session to take up the pension reforms had not been set. Kennedy said he expects the most debated issues among legislators between now and the session will be the additional contributions from local boards and employees, and the level of benefits and risk under the new plan.

Proposed pension reform framework*

General provisions affecting school districts:
• Full payment of the actuarially required contribution with a new funding formula that will plow “hundreds of millions” more into all plans to shrink the unfunded liability more quickly.

• Bill will not go into effect until July 1, 2018.

What is not in the plan:
• No clawbacks of already provided cost-of-living increases for retirees.

• No increase to retirement age.

• No enrollment of new teachers in Social Security.

Teachers’ Retirement System specifics:
• Current teachers stay in the current defined benefit plan until they reach retirement eligibility – 27 years or age 60. Those who reach that threshold on July 1, 2018 may opt to continue in the current defined benefit plan for an additional three years, but otherwise, their TRS benefit would be frozen at that point and they would be shifted into a defined contribution (DC) plan similar to a 401(k) plan like new hires.

• New teachers and those who hit 27 years after July 1, 2018 (with exception noted above) will be enrolled in a DC plan.

• Current teachers with less than five years of service in the current plan have the option of transferring to the DC plan.

• DC plan for current teachers who reach full eligibility by July 1, 2018 calls for an employee contribution of 10 percent and a state contribution of 8 percent.

• DC plan for new teachers and those who hit full eligibility after July 1, 2018 calls for employee contribution of 9 percent with the option for an additional 3 percent; and an employer contribution of 6 percent, with the state picking up 4 percent of that and the local district paying 2 percent.

• The “high three” for benefit calculation is retained until June 30, 2023; after that, it becomes “high five.”

• Retiring teachers can use their accumulated sick leave for benefit calculation until July 1, 2023. After that, it’s gone.

• Cost of living increases: no clawback for current retirees, but future COLAs for current retirees will be suspended for five years. COLAs for future retirees will not begin until five years into retirement.

• Employees must contribute an additional 3 percent of their salary to fund the retiree health insurance program.

• Future retirees must suspend their pensions if taking a full-time job in the “public sector” for the duration of that employment.

County Employees Retirement System specifics:
• All new hires will enroll in a DC plan. See chart below for details.

• Tier 1 employees will stay in the current defined benefit program until full retirement eligibility at 27 years of service or age 65. Tier 2 employees will stay in the current defined benefit program until their full retirement eligibility per the “rule of 87” or age 65. Both groups will move into a DC plan after reaching the full eligibility threshold.

• Tier 3 employees will immediately roll over their current hybrid plan into the new DC plan.

• Employees must contribute an additional 3 percent of their salary to fund the retiree health insurance program.

• Accrued sick leave balance is capped on June 30, 2018. After that, sick leave credit will not be used to determine retirement eligibility.

• Comp time payments will count toward benefit calculation only for those retiring on or before July 1, 2023.

• “High five” is required to be a full 60 months of service.

• Future retirees must suspend their pensions if taking a full-time job in the “public sector” for the duration of that employment.

*As reflected in the summary document released Oct. 18 by the governor and GOP legislative leaders