Costly Pension Plans Are Fanning the Flames of Teacher Unrest
Kentucky Fight Over Benefits Underlines Stakes for Other States
Across the country, teachers are walking out of their classrooms to fight for higher pay.
But in Kentucky, where teachers’ pension benefits take the place of Social Security, educators are more anxious about the future of the state’s underfunded pension system—and furious at elected officials for letting it get to this point.
“What concerns me is not being able to eat when I’m 80,” said Lisa Proulx, a 4th grade teacher in Jefferson County, Ky. “I’m not eligible for my husband’s Social Security. ... If I retire and there’s a problem with the pension system—that’s scary.”
The political meltdown this year over efforts to address Kentucky’s pension crisis—which has sparked teacher walkouts, lawsuits, and raucous protests—could serve as a warning light for other states facing the politically volatile issue of what to do about teacher retirement costs.
Across the nation, states’ pension obligations for public employees are accelerating, spurred on by investment losses during the Great Recession, a wave of Baby Boomers’ retirements, and years of fiscal mismanagement. That has huge implications for K-12 spending.
Teachers’ pension debt today tops out nationally at more than $516 billion, and states such as Connecticut, Illinois, and Michigan project they won’t have enough money within the next decade to pay teachers what they’re owed at retirement.
At the same time, hefty increases to school spending in some states end up being used to pay down grossly underfunded pension obligations, putting pressure on the money available for instructional spending, staff salaries, and other needs.
“The way these pensions are set up allows mischievous politicians and different groups to play games and kick the can down the road,” said Michael Podgursky, a school finance expert at the University of Missouri, in Columbia. “But guess who’s paying for this? The kids currently in school because there’s less money for books and school supplies, and the current teachers who will get less in their paycheck and less generous pensions.”
Close to 10 cents of every dollar spent on education today goes toward retirement costs, according to an analysis by Robert Costrell, a finance expert at University of Arkansas. That’s double the amount spent on retirement costs in 2004.
But for governors and state lawmakers, addressing that can be financially complex and politically fraught.
Just this week, for example, more than 200 teachers protested at the state capitol in Denver after a state senator proposed a bill to, in part, cut public employee retirement benefits. The state is more than $32 billion short of the necessary money to pay its retirement costs.
In New Jersey, the tenure of former Gov. Chris Christie was bedeviled by his failed efforts starting in 2010 to overhaul that state’s pension system by, among other things, kicking out part-timers and switching new teachers over to 401(k)-type plans.
Kentucky is perhaps the highest-profile battleground for pensions in a year when teacher activism is on the rise nationally.
Kentucky’s public employee retirement system, which includes its teachers, was cited by Standard & Poor’s last year as the nation’s worst-funded in the nation. The state is $14.5 billion short of what it will need to cover the retirement costs for its 71,000 current teachers and 51,000 retirees over the next 30 years.
The state last year paid $1.5 billion toward pension costs, up from $624 million in 2008, according to the state’s budget director.
And Kentucky teachers are among the 40 percent of teachers nationally who are not eligible for Social Security—heightening the sense of urgency among educators.
Kentucky’s pension spending in the last decade has grown nearly five times as fast as revenues, according to an analysis conducted by a state-appointed firm.
“Kentucky has been operating with a structurally imbalanced budget for years now,” said Brigitte Blom Ramsey, the executive director of the Prichard Committee for Academic Excellence, an advocacy group that has long pushed for more school funding.
When in 2016 Republicans took control of the statehouse, Gov. Matt Bevin, a Republican, promised to make dramatic changes to the state’s pension system—and did so in a way that took aim at teachers.
The battle came to a head earlier this year over a bill that would have reduced yearly cost-of-living increases for retired teachers to 0.75 percent for the next 12 years, down from 1.5 percent. After protests, legislators revised the proposal to cut the cost-of-living increases to 1 percent until the pension system is 90 percent funded.
Both versions were widely panned by educators. The final bill made no significant changes to current teachers or retirees’ benefit plans—but it made some other changes that have drawn fire from both teachers and district leaders.
For one thing, teachers who are hired after the start of 2019 will now be put into what’s known as a “cash-balance” plan, which is a hybrid of a traditional defined-benefit pension and the kind of 401(K) retirement savings plan common in the private sector.
In addition, school districts are now expected to contribute 2 percent of teachers’ salaries to their pension plans, on top of the contribution from the commonwealth. Previously, local districts did not pay into the pension fund for teachers—according to the Teachers’ Retirement System of Kentucky, their contributions under the new cash-balance plan will help pay down unfunded liabilities.
District Leaders Worried
That last shift concerns district leaders, who will now have an extra expense to their budget that will continue to grow over time.
“It’s a slow bleed, really,” said Robb Smith, the superintendent of Bellevue schools, a 770-student district in the northern tip of the state. “For a small district like ours, that will be especially troublesome. ... It will definitely cause us to be more conservative with distributions [of funding] for students.”
District leaders are also worried about how the changes will affect new-teacher recruitment. New teachers have been removed from the state’s “inviolable contract,” which means policymakers could make changes to their retirement benefits down the road.
“That just guarantees them a big, fat nothing,” said Stephanie Winkler, the president of the Kentucky Education Association. “I wouldn’t want to go into a job that has a guarantee of a big, fat nothing when I dedicated my life to public service. ... It’s kind of a slap in the face.”
Chad Aldeman, a principal at Bellwether Education Partners, said his analysis shows the cash-balance plan for new teachers could be better for educators during the first two decades of their careers, allowing them to build wealth more quickly than the existing plan. By contrast, the existing plan is estimated to be more beneficial for a teacher who stays in the profession for more than 21 years, because it is backloaded so veteran teachers earn more in retirement wealth in the latter part of their careers.
Still, Aldeman said Kentucky teacher-turnover data suggest less than half of new teachers will reach 21 years in the profession. And he said the cash-balance plan will ensure that Kentucky does not accrue additional unfunded liabilities.
“Hopefully over time, this plan will get established, and people will enroll in it, and the fervor will die down,” he said. “And hopefully, over time people will see the benefits of [this plan].”
‘We’ve Had Enough’
The specifics aside, the way Kentucky policymakers handled the pension changes only inflamed tensions around the issue. The final bill was tacked onto a measure about sewer system regulations and passed in a matter of hours, spurring outrage from educators.
KEA’s Winkler said “there was no time in the 11th hour to talk about the final proposal or even see it.”
The day after the pension bill passed the legislature, droves of teachers called in sick to protest at the capitol, forcing more than 20 school districts to close. The following Monday, schools in all of Kentucky’s 120 counties were closed (though many for spring break) as teachers again gathered at the capitol, holding a giant sign proclaiming, “We’ve had enough.”
“They’re not hearing us, they’re not making us a part of the conversation,” said Caroline Wilkerson, a 2nd grade teacher in Nicholasville. “We didn’t have time to process it.”
The union later joined the state’s attorney general in a lawsuit against the governor that seeks to overturn the pension reform law.
Dozens of educators have now filed to run for state legislative seats, and Winkler said the teachers’ union will leverage the momentum among educators to elect pro-education candidates in November.
Meanwhile, the governor’s rhetoric has added fuel to the fire. Bevin called teachers “selfish and short-sighted” for protesting the pension changes. After he signed the pension bill into law, he called KEA leaders “absolute frauds” on a local radio show. He also said teachers were “[punishing] students” by walking out of the classrooms and later “guarantee[d]” that children were sexually abused because they were left home alone during school closures, remarks he later apologized for.
“It’s really disheartening and disappointing that we are seen as the enemy,” Wilkerson said. “We are not seen as an important part of the community, which I feel like we are.”
Added Aldeman: “Hopefully, a political lesson states can learn [from watching Kentucky] is that this is probably not the best way to make pension changes.”
Experts warn, however, that the underlying problem for states isn’t going away.
“I think that in some places that have these really huge problems from pensions, the policymakers will need to get creative on how to deal with this,” said Martin F. Lueken, a finance scholar who helped author a paper on teacher pensions for the National Council on Teacher Quality. “To solve these problems, you need wholesale reform. You have to stop the bleeding.”
Vol. 37, Issue 28, Pages 1, 20Published in Print: April 25, 2018, as Pension Woes Have Teachers on Front Lines