Kentucky’s Teachers Embrace a Broken Pension System

They’re making it harder to meaningfully boost their pay.

Last Friday, more than two dozen Kentucky school districts closed as teachers rallied at the state capitol to support a budget that boosted school funding — and to denounce reforms to the state’s pension system.

Kentucky’s dispute follows teacher walkouts in West Virginia and Oklahoma, and a threatened action in Arizona, all of which yielded sizable pay increases and widespread support. And like their peers in other states, Kentucky’s teachers have legitimate concerns. The average Kentucky teacher salary was $52,134 in 2015–16 according to National Education Association data, down more than 2 percent since 2008 — even as Kentucky’s inflation-adjusted per-pupil expenditures rose 14 percent over that span.

Enacted over Governor Matt Bevin’s veto, the new budget will increase per-pupil education funding by $19, amounting to about $12.5 million total. It will also preserve the state’s current level of education funding for other commitments, such as transportation.

But meanwhile, the budget provides $3.3 billion over the next two years for public-employee pensions, a stopgap needed to sustain the state’s strapped system — and a separate bill, SB 151, makes some reforms to that system. Kentucky’s teachers weaken their case by fighting these reforms, which are likely to be a bigger long-term win for teachers than the $19 per-pupil spending boost.

The Bluegrass State, whose pension system S&P has rated as the worst-funded in the country, illustrates how teacher wage stagnation is driven in no small part by pension issues. Former Obama administration official Chad Aldeman has calculated that if Kentucky did not have to spend its money paying down pension debt, teacher salaries would be $11,400 higher today. Nationwide, Aldeman finds that “for every $10 states and districts contribute to teacher pension plans, $7 goes toward paying down pension debt, and only $3 goes toward benefits for current teachers.”

Seen in this light, Kentucky’s bill is a measured attempt to uphold promises to current and retired teachers while addressing pension obligations that are unsustainable and a huge drag on teacher pay. It places new teachers in a “hybrid” retirement plan that includes features of both a traditional pension (like teachers in Kentucky have now) and a 401(k) (like most plans offered in the private sector). Under this hybrid system, new teachers will contribute 9.1 percent of their salary, just as current teachers already do.

However, the state’s contributions will equal only 8 percent of salary for new teachers, as opposed to 12.3 percent for current teachers. Then, upon retirement, instead of receiving a set pension, new teachers will get back everything they’ve contributed plus 85 percent of all investment returns.

The new plan actually produces greater returns for teachers over the first two decades of service than the existing pension plan does, since the traditional pension plan backloads its benefits. New hires who teach for 30 years or more will make out less well than under the current plan, but in a profession where fewer and fewer new hires plan on staying for three decades, the deal makes good sense. Indeed, Aldeman has calculated that over the first ten years of the traditional pension plan, a teacher accrues only about $32,000 in retirement savings, while a teacher would accumulate nearly $85,000 during the period under the new plan.

The bill also stipulates that, while current teachers will still be able to retire after 27 years on the job, those hired next year will have to work longer — until age 57, if they’re on the job for 30 years. SB 151 would also allow the legislature to amend retirement benefits for future teachers, a shift from the current “inviolable” contract.

In short, SB 151 holds current and retired teachers harmless, while creating a better system for new hires. While the bill’s sponsor, Representative Bam Carney, acknowledges that the legislation would save the state only about $300 million over the next 30 years — a tiny fraction of the state’s $33 billion in unfunded liabilities (nearly half of which is in teachers’ pensions) — it would stop the state from accruing additional unfunded obligations.

Digging in for a dogged defense of a deeply indebted, outmoded pension system is the wrong way to tackle teacher compensation.

Why did such a measured bill draw such a vociferous response from teachers? For one thing, teachers are justifiably miffed about how the bill got passed. Originally a bill on sewage funding, SB 151 was amended to include pension reform, went through committee, and passed both the house and the senate — all in one hectic day. Kentucky Education Association president Stephanie Winkler has observed that, due to the crazy process, “No matter what the language of the bill says . . . [legislators] have created an overall environment of deception and mistrust.” For another, teachers are angry following months of vitriolic rhetoric from Bevin, who has called them “selfish and shortsighted” and opined during Friday’s protests that their presence in the capitol meant “children were harmed — some physically, some sexually, some were introduced to drugs for the first time.” Teacher frustration is thus understandable, but can also lead teachers to fight the wrong fight.

Many states are wrestling with a version of Kentucky’s pension problems. In 2015, the National Center for Teacher Quality reported that, nationwide, teacher pension systems had a half trillion dollars in unfunded liabilities. This has practical consequences. Indeed, the University of Arkansas’s Bob Costrell reports that, between 2004 and 2015, pension costs nationwide rose from 4.8 percent to 8.9 percent of education expenditures — meaning less money to support today’s students and teachers.

Teachers in places like West Virginia, Oklahoma, and Arizona are making a good case for higher pay and finding popular support along the way. But digging in for a dogged defense of a deeply indebted, outmoded pension system is the wrong way to tackle teacher compensation. Indeed, such demands will only leave parents, taxpayers, and civic leaders skeptical about whether new dollars are being used to finance debt payments rather than fund teacher salaries or student needs.

Frederick M. Hess is director of education-policy studies at the American Enterprise Institute. Brendan Bell is a research assistant at AEI.

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