Teachers' Retirement System

Teachers' Retirement System

Teachers' Retirement System: Progress, but a long way to go 
Kentucky School Advocate
September 2016
By Madelynn Coldiron
Staff writer
The new state budget plowed an unprecedented amount of money into the Teachers’ Retirement System of Kentucky, but school board members shouldn’t cross off the funding issue as a “one and done.”

The biennial budget infused the teachers’ pension system with an additional $973 million over the two-year span. “This is 94 percent of the additional funding we requested, which is fantastic,” said Beau Barnes, TRS deputy executive secretary of operations and general counsel. “We’re very, very thankful to the governor and the General Assembly for this huge step that was taken with this budget for teachers’ pensions.”

However, the system is still a long way from erasing its unfunded liability, which, by traditional actuarial calculations, stood at 55.3 percent funded at the close of the 2014-15 fiscal year, which amounts to a $14 billion shortfall. That won’t be erased overnight, Barnes said.

“What we’re doing with the additional money is attempting to pay off the unfunded liability over a period of 30 years,” he explained. “We need to do it 14 more times.”
The chart at top shows the pattern of past and projected TRS asset selloffs prior
to the additional funding pumped into the system by the 2016 General Assembly.
The next chart shows the pattern adjusted for that influx of funding.
The unfunded liability figure at the close of the 2015-16 fiscal year will not be available until around December, Barnes said, because fiscal year-end information has just now been coming in and the actuaries, accountants, investment consultants and others are starting to analyze and audit the data. Given that, it’s not possible at this point to gauge the exact impact the nearly $1 billion infusion will have on the unfunded liability. The additional funding certainly helps, Barnes said, but many other factors go into determining the system’s funding status.

For example, the stock market has been lackluster over that period, which will be a “significant factor” in that liability calculation, he said.

Besides the added funding pumped into TRS, the state budget also put $125 million into a newly established Permanent Pension Fund from which all the state’s public pensions can potentially draw starting in 2018. The General Assembly decides whether, and how, to divide the funds among the pension systems.

Asset sales
While the full picture on current unfunded liability may be hazy, one thing is certain, however: the pattern of steadily increasing selloffs of TRS assets to meet its obligations will be stabilized by the added funds from the new state budget. “It’s made a big, big difference,” Barnes said.

For example, without the new allocation, TRS was on track to sell a little over $800 million worth of assets in 2016-17; after the infusion, that figure dropped to $250 million.

The additional money coming into the system also will give TRS more leeway with its cash flow to take advantage of investment opportunities that had been hampered over the past few years. “Before, we had to forgo some of those buying opportunities – not having sufficient cash to take full advantage of purchasing stocks for less than they are worth in down markets, for example,” Barnes said. “Even more importantly, it will help TRS avoid selling stocks in down markets when they are undervalued.”

Upcoming audit
The state was expected to issue a contract in August for an outside firm to conduct a performance audit of TRS, the Kentucky Retirement Systems – which includes the County Employees Retirement System that covers school district classified employees – and the retirement systems that cover the judicial and legislative branches of state government. The request for proposals calls for “a complete, comprehensive and independent analysis of each plan,” including past performance and a review of options for plan restructuring aimed at providing “near-term liquidity and long-term sustainability.” The cost of the reviews will be paid with $3 million from the Permanent Pension Fund.

“We are working with the governor’s office right now on getting information together for whichever firm is selected to do this performance review,” Barnes said.

That work, plus the findings of a TRS task force last year, are expected to form the basis of any recommendations for tweaking the system that might go before the 2017 legislature. Discussions could encompass a new benefit tier for incoming new teachers.

Communication continues
Barnes thinks the chances “are very good” that the General Assembly will continue the pattern of putting additional funding into TRS with each new budget. It will be important to continue communicating information about the system with lawmakers and the governor’s budget staff, he said, to keep them fully informed about its funding status. “And we want to meet with new legislators to communicate with them, to make sure they understand the retirement system and how it works,” he added.

Much of the additional money this time around was drawn from a one-time, $500 million transfer of money from the Public Employee Health Insurance Trust Fund (does not include teachers) plus 9 percent agency cuts across much of state government.

“But if revenues continue to grow normally, particularly now that there have been some budget cuts made in some areas of state government, that would be more than enough to pay for the full ARC (actuarially required contribution) that the Teachers’ Retirement will need in 2018 without having to rely on any monies from the Kentucky Employee Health Insurance Trust Fund,” Barnes said. “So we’re very, very optimistic.”

Even if revenues drop, “We will still make a budget request for the full ARC,” he added. “If we don’t get a handle on this, then the progress we’ve made will be unwound, the progress that we’ve made will be stalled. We’ll see the funding status continue to decline – it’ll be harder to address as it declines, and the bond rating agencies are still out there and they would be very concerned if this very positive step that was taken in this session in the budget for the teachers’ pension fund were not continued in future budgets.”
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