Critically needed: new pension system for incoming teachers
By JIM WATERS
The frustration expressed by Senate Majority Leader Damon Thayer following Franklin Circuit Judge Phillip Shepherd’s decision to strike down a pension-reform law cobbled together originally as Senate Bill 1 and then watered down and pushed through during this year’s General Assembly session as a substitute for Senate Bill 151 (SB 151) — originally wastewater-treatment legislation — is understandable.
“I’m tired of dealing with it,” Thayer, R-Georgetown, told reporters. “It’s become hateful, hostile and toxic from the defenders of the status quo who are unwilling to accept a modicum of change just to put their pensions on the right track.”
Thayer’s not exaggerating.
The original pension legislation introduced in February proposed a reduction in cost of living adjustments that would have reduced the growth of the average retiree’s monthly check by the equivalent of a couple of cups of coffee each week while providing enormous relief to the pension system.
However, “defenders of the status quo” weren’t having any of it.
Thayer warns that if Shepherd’s decision stands, the commonwealth’s retirement plans will “continue to spiral downward” and “defenders of the status quo can declare victory and watch while our pension systems collapse.”
Of course, if that were to happen, Thayer’s Grand Old Party would be blamed for allowing the implosion, even though the Republican-dominated legislature approved Gov. Matt Bevin’s proposal to spend 15 percent — or $3.3 billion — of the new state budget just on public pensions.
Republicans with a supermajority in both legislative chambers also enacted a host of new taxes to fund the increased contributions — something even Democrats didn’t touch during their decades of power.
Surrendering now would create a dilemma for Republicans, forcing them to decide what happens to those tax hikes should the pension bill get permanently thwarted by the courts.
A new Bluegrass Institute proposal attracting support from key members on both sides of the political aisle would hand those refusing to accept even “a modicum of change” their own dilemma.
The proposal requires employers to contribute at the same levels as the cash-balance policy in SB 151 but also provides defined benefits for teachers by requiring plan administrators to adjust employees’ contributions, benefit-accrual rates and retirement eligibility in order to maintain full funding of the systems without increasing those employer payroll-contribution rates covered by taxpayers.
This represents a dramatic departure from the existing flawed defined-benefit paradigm that allows lawmakers to award politically motivated benefit enhancements that are repaid with interest and charged to future generations of taxpayers and public employers as a percentage of payroll – a strategy fraught with the potential to create massive unfunded liabilities and dramatic increases in employer payroll-contribution rates, even when long-term investment returns meet or exceed expectations.
The tradeoff: in exchange for eliminating a few egregious policies like using accrued sick days to spike final compensation and lifetime pension payments or arbitrarily enhancing final compensation formulas based solely on longevity, teachers in this new plan would have a stable, generous and protected benefit that depends on their own payroll contributions, set payments for taxpayers and the plans’ investment performance rather than on Frankfort’s politicians.
Those protecting the status quo might have a stronger position had benefits historically been limited to those awarded in advance and properly pre-funded with payroll contributions made by teachers and their employers.
Of course, had such fiscal discipline been exercised historically, Kentucky wouldn’t now be facing the nation’s worst pension liability.
All parties ought to at least agree that the commonwealth cannot continue to place new teachers in the current declining system.
Gov. Bevin should seriously consider calling a special session before the end of the year, limiting its agenda to placing all new teachers into this new plan offering defined benefits for beneficiaries and fixed employer payroll-contribution rates and letting the left pay the political price for its harmful obstructionism.
Jim Waters is president and CEO of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. He can be reached at firstname.lastname@example.org and @bipps on Twitter.