The state should ensure that excessive resources are not committed to funding teachers' pension systems.
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.
Kentucky Teachers' Retirement System, Comprehensive Annual Financial Report as of June 30, 2015.
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.
Kentucky did not respond to repeated requests to review this analysis.