The state should ensure that excessive resources are not committed to funding teachers' pension systems.
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.
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.
The Kentucky Teachers' Retirement System did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.