Pension Sustainability: Kentucky
Pensions Policy
Analysis of Kentucky's policies
As of June 30, 2015, the most recent date for which an actuarial valuation is available, Kentucky's pension system for teachers is 55.3 percent funded, an increase of 3.4 percentage points since NCTQ's last report. Its current pension debt exceeds $20,500 per pupil throughout the state. It also has an amortization period of 29.3 years. This means that if the plan earns its assumed rate of return of 7.50 percent and makes its full actuarially determined contribution payments, it would take the state 29.3 years to pay off its unfunded liabilities. The unfunded liability will not be fully amortized unless the present statutory contributions, supplemental funding, and special appropriations, plus an additional 13.49 percent which is not covered under statute, is contributed. Kentucky's funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.
In addition, Kentucky commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 29.755 percent, which is paid by the state rather than school districts, is too high. The mandatory employee contribution rate to the defined benefit plan of 12.855 percent is reasonable considering that teachers are not also contributing to Social Security.
Recommendations for Kentucky
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. However, Kentucky should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
State response to our analysis
Kentucky did not respond to repeated requests to review this analysis.
-
Kentucky
Select another topic
Delivering Well Prepared Teachers
- Admission into Teacher Preparation
- Elementary Teacher Preparation
- Elementary Teacher Preparation in Reading Instruction
- Elementary Teacher Preparation in Mathematics
- Early Childhood
- Middle School Teacher Preparation
- Secondary Teacher Preparation
- Secondary Teacher Preparation in Science and Social Studies
- Special Education Teacher Preparation
- Special Education Preparation in Reading
- Assessing Professional Knowledge
- Student Teaching
- Teacher Preparation Program Accountability
Expanding the Pool of Teachers
Identifying Effective Teachers
- State Data Systems
- Evaluation of Effectiveness
- Frequency of Evaluations
- Tenure
- Licensure Advancement
- Equitable Distribution
Retaining Effective Teachers
Exiting Ineffective Teachers
Pensions
Research rationale
Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.
Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.
Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.
Pension Sustainability: Supporting Research
NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.