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Pension Sustainability: Kentucky

Retaining Effective Teachers Policy

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Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Meets a small part of goal
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: Kentucky results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/KY-Pension-Sustainability-9

Analysis of Kentucky's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, Kentucky's pension system for teachers is 61 percent funded and has an amortization period of over 30 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state more than 30 years to pay off its unfunded liabilities. Kentucky's amortization period does not meet the regulatory requirement of 30 years, and its 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 17.795 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 10.85 percent is reasonable considering that teachers are not also contributing to Social Security.

Citation

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 and had an amortization period of less than 30 years 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. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

The Kentucky Teachers' Retirement System did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.

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Research rationale

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.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).

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