Frankfort – Noting it remains the only concrete option anyone has offered, House Speaker Greg Stumbo filed legislation on Wednesday that would put the state on a path to strengthen the Kentucky Teachers’ Retirement System (KTRS).
“House Bill 1 is essentially the same bill that I sponsored and the House adopted last year, because we have the same problem we did 12 months ago: A public retirement system with a $14 billion dollar liability and no way to adequately address it,” Speaker Stumbo said. “Months of meetings by a task force studying this issue have increased awareness, but it still left us with no real solution. My legislation is a blueprint forward, at least on the funding side.
The one thing I know for sure is that our teachers, their retirees and taxpayers cannot afford for us to wait another year to act.”
HB 1 is based on a proposal that KTRS unveiled to legislators in late 2014. In short, it calls for the state to issue up to $3.3 billion in bonds to take advantage of the system’s long-term investment gains. Its most recent one-year return rate topped 5 percent; its five-year return was exactly 12 percent, and its 20-year return was 7.6 percent – all above the bond interest rates the state could expect to see.
The bonding would give the state nine years to phase in the additional payments it needs to meet the Annually Required Contribution, or ARC, that would eventually bring the long-term liability under control. During those early years, the state would pay for the bonds largely using money the state is already giving to KTRS for previous bond payments and other programs.
“I normally would not be in favor of pension bonds, but it is clear to me that KTRS can earn enough to pay back the bonds and interest without putting us at undue risk,” Speaker Stumbo said. “Research also shows that pension bonds used in other states have generally performed well. Our window of opportunity is drawing to a close, however, given last month’s interest-rate hike by the Federal Reserve, the first increase in nearly a decade.”
According to KTRS, if nothing is done, its requests for additional money – on top of the hundreds of millions of dollars it already receives annually – will rise from about $500 million extra each year to more than $2 billion extra each year within the next two decades. To cover benefits now, KTRS reported that it had to sell $650 million in assets last year and is on track to sell another $750 million this year.
“The fact is, we owe what we owe, and we have to pay it,” Speaker Stumbo said. “It is unfeasible for us to get to the ARC this budget cycle, but my plan stops the bleeding and gets us to the point where we can make the ARC. We need to get ahead of the problem now, or we’ll pay a far steeper price down the road.
“Those who oppose this need to tell teachers and taxpayers what plan they have to bring the liability down,” he added. “Making this situation even more critical is the fact that teachers do not have Social Security, meaning they rely even more on their pensions than other state retirees. In addition, teachers have long pre-funded their annual cost of living allowances, and they took a major step forward in 2010 when they agreed to contribute more to stabilize their health insurance. They have made sacrifices to help bring the liability down; now, it’s the state’s turn.”