A big change in Kentucky’s retirement system for new teachers is a credit positive for the state, according to Moody’s Investors Service.
The new legislation will cut costs and lower the chances of the state seeing new and unexpected pension liabilities, Moody’s said. House Bill 258, enacted with a March 29 override of Gov. Andy Beshear's veto, creates hybrid structure for teachers hired after Jan. 1, 2022 that will provide a mix of defined-benefit and defined contribution retirement plans.
The law also changes the contribution requirements for state and other municipal employers for pension and other post-employment benefits (OPEBs), focusing on health care and life insurance.
The legislature projects the changes will save the state and other municipalities
The tier system is new to the Bluegrass State, though other states have used it for years.
New York has six tiers for the
The Republican-dominated Florida legislature is now looking at changing its pension systems for all employees. Under a bill introduced State Sen.
The proposal is drawing fire from unions and Democratic officials.
The Kentucky bill was also contentious and set up a fight between lawmakers and the governor.
The GOP-dominated General Assembly overrode the Democratic governor's veto of HB 258, which was contained in the state’s
Beshear said that the cut in benefits would make it harder to attract and hire good teachers.
“For new teachers, the most important, most lucrative benefit is being slashed,” the governor said. “Yet there is no increase in salary, there is no increase in other benefits.”
The new law shifts some responsibility for retirement benefit costs to employers and away from the state government, Moody’s Vice President Thomas Aaron and Managing Director Timothy Blake, CFA, wrote in the report.
K-12 school districts will take funding responsibility for new employees, Moody’s said, adding that the new hybrid benefit tier is designed to keep school districts' contributions fixed relative to payroll. The state will still be responsible for funding legacy liabilities. The state is now responsible for almost all of TRS’ pension and OPEB costs and liabilities.
Under the system, new employees of K-12 school districts and certain state universities will contribute 9% of their salaries toward defined-benefit pensions, 2% to a defined-contribution account and 3.75% for their retiree healthcare benefits, making a total contribution of 14.75%. Employers will make a total contribution of 13.75%.
Moody’s assigns an Aa3 rating to Kentucky with a stable outlook. S&P Global Ratings rates the state A, Fitch Ratings rates it AA-minus with a negative outlook and Kroll Bond Rating Agency rates it AA-minus with a stable outlook.
“At the margin, HB 258 is an improvement to Kentucky’s unfunded pension liabilities although they remain significant,” Paul Kwiatkoski, managing director at KBRA, told The Bond Buyer.
Late last year, Fitch said its assessment of the state “incorporates a sizable step-up in pension contributions as the commonwealth moves toward full funding based on more conservative actuarial assumptions, as well as additional costs the commonwealth may bear for quasi-governmental entities participating in a state pension plan.”
Moody’s said in its report that the benefit changes will not immediately decrease Kentucky’s high unfunded liabilities and rising pension costs, which it said will remain a key budget challenge.
“While the state will gradually shift some costs to K-12 school districts, the legislation provides downside protection to districts because certain benefits may be adjusted prospectively if funding shortfalls materialize,” Moody’s said.
TRS accounted for about two-thirds of the state's $41 billion of adjusted net pension liability and around half of its $6 billion adjusted net OPEB liability.
The fiscal 2021 budget contains full funding of the state’s actuarial required contributions for the TRS and the Kentucky Employees Retirement System. In fiscal 2019 and 2020, the state made its full contribution to the plans after many years of shortfalls.
Moody’s noted that while TRS is the largest component of its liabilities, Kentucky also faces a significant funding challenges from other plans administered under the Kentucky Retirement Systems, such as the Kentucky Employees' Retirement System
“HB 258 solely affects benefits provided under TRS, by themselves a long-standing point of political contention, as signified by the governor's veto and subsequent legislative override,” Moody’s said.
