Kentucky has been funding health benefits for retired teachers for decades. But this year for the first time, that payment was dependent on a budget surplus. This move — to cut the health insurance funding from the state’s biennial budget and instead pay it only in the event the state made unexpected revenue — has been described as a necessity by legislators, and a risky move by the retirees depending on the benefits.
“In our view, that was not the ideal way to fund it,” said Brent McKim, president of the Jefferson County Teachers’ Association, the union representing JCPS teachers.
The funding was announced earlier this month when Gov. Matt Bevin and state lawmakers boasted the good news of a nearly $200 million state surplus. About half of that will go to the ailing pension fund for most state workers. About $70 million of the surplus will be used to pay for the health benefits of retired teachers who are not yet 65 and thus eligible for Medicare.
“It worked out in the end, but it really should be in the budget proper,” McKim said, adding that JCTA appreciates the state’s commitment to funding teachers’ pensions.
When lawmakers were drafting the 2018-2020 state budget, it was expected to be tight.
“It was particularly tight this past budget cycle because we had to fund the pension, which hadn’t been done in over a decade,” said Republican Representative Jason Nemes from Louisville, who’s on the House budget committee. “There’s a lot of debt there.”
About $43 billion of debt. That’s what Kentucky owes all state employees expected to retire over the next three decades, and does not have the savings to pay.
That shortfall is due to several factors, including especially poor investment returns during the recession and the state’s failure — until recently — to make contributions to support future retirees. Until this budget, which created casualties.
“We put a billion dollars into the pension system,” Nemes said. “And when you have an approximately $11 billion budget, $1 billion going to pensions elbows out the opportunity to pay for other things.”
Lawmakers made cuts, including $70 million in funding for the under-65 retired teachers’ health care plan. That’s a program about ten thousand Kentucky retired teachers rely on, including former JCPS teacher Royce Whitman.
Whitman taught in Jefferson County for 27 years, as a special education teacher and librarian. When she was 58 years old, she retired to help care for her parents, both retired teachers themselves.
Her mom has dementia, and both her parents have physical issues. Whitman says she spends about three or four days a week helping them out.
“When you teach, you’re in it 24/7, so there was just no way to do that and continue to work full time,” Whitman said.
Before she retired, Whitman did the math. She met with a financial adviser and decided that between her investments, her pension and her expenses, including $200 a month for her health insurance, she could afford to retire. But now she feels the future of that benefit seems more uncertain: lawmakers will once again consider the health plan’s funding when it negotiates another budget next year. What if the legislature pegs that insurance coverage on a surplus again, and instead, they get a recession?
Whitman says she worries it could affect her health benefits or dramatically raise her monthly premiums.
“We’ve counted on this when we go to retire. This is what we expect. It’s what we were promised all along,” Whitman said.
Kentucky Law Obligates State To Pay For Retired Teachers’ Health Plan
Back in 2010, the state passed a law agreeing to fund the retired teachers’ health benefits.
There are two health plans for retired teachers: One is a comprehensive health plan for retirees under the age of 65, which currently serves about 10,000 retirees and costs the state about $5.5 million per month. The other plan is a supplemental plan for Medicare-eligible retirees over the age of 65; it has about 31,000 retirees on it, and costs a total of $8 million per month.
From 1998 through about 2005, the 65-and-older plan didn’t have enough money to pay for its current retired teachers health benefits. To resolve that, the state took money out of the teacher’s pension fund — which is also underfunded — to cover the difference. The state paid the pension fund back later in bonds, said Beau Barnes of the Kentucky Teachers’ Retirement System.
To prevent that from happening again, the teachers’ unions and the legislature negotiated a bill in 2010 called the Shared Responsibility Bill. It said that all teachers would pay 3 percent more out of their paychecks, and school districts would match that, to grow a fund to secure retired teachers’ health insurance. The state would agree to pay into the plan just for teachers who retire before they turn 65, and teachers and schools would fund the over-65 plan themselves.
There’s a clause in the law, though, that says the General Assembly can suspend the state’s payments to this fund “if in its judgment the welfare of the Commonwealth so demands.”
For the first time ever, lawmakers argued that money for the health plan for this year was better spent on pensions, income tax cuts and the needs of a tight budget.
Gov. Matt Bevin didn’t include the fund in either year of his biennial budget. The House wanted to fund it both years. In the end, the final state budget guaranteed funding the retired teacher health plan only in the first year — 2018. In the second year — 2019 — funding would be tied to a surplus.
Rep. Nemes — who initially voted to fully fund the plan — says it was a hard decision for legislators to ultimately not fund it. But he said other programs needed that money, too.
“$70 million, you know, it’s a lot of money,” Nemes said. “This is a question that we wrestled with, because it was extremely important to us to fund schooling, to fund teachers, to fund their pensions, and to retain their health care.”
The state also raised sales taxes and tobacco taxes this year, and the economy is doing well, so it wasn’t shocking that there was a surplus. But what if there hadn’t been one?
Trustees of the KTRS pension board, which manages retired teachers’ pensions and health plans, assured lawmakers that it could cover the pre-65 health costs if a surplus didn’t come through. The board could pull money out of that fund created in the Shared Responsibility Law that’s supposed to secure healthcare for retired teachers over the age of 65.
Another option would have been to raise monthly costs for former teachers like Royce Whitman. When Gov. Bevin proposed cutting funding for that plan entirely, JCTA put out an action alert in its newsletter advising teachers to call on their representatives to protect retirees’ premiums from potentially tripling. But the board’s executive secretary and general counsel Beau Barnes said it was more likely the KTRS board would have drawn from the other health insurance fund rather than raise premiums this year if the surplus hadn’t come through.
Lawmakers may have wrestled with these options, but one national pension expert says the choice to draw money from a health insurance fund to put more into pensions was reasonable.
“I think it’s quite reasonable because pensions are, in Kentucky, constitutionally guaranteed. That’s an obligation that the state has to meet,” said Peter Kiernan, a New York attorney who specializes in public pensions. “Kentucky’s one of the worst, if not the worst pension system in the United States in terms of funding levels.”
While the state is obligated to offer retirees a health plan under teachers’ contracts, the benefits of that plan aren’t a constitutional guarantee, the way that teachers’ and other state workers’ pensions are, Kiernan argues.
The Bottom Line
This story is just one piece of a larger puzzle. The big picture is that Kentucky is struggling to pay the expected health benefits and constitutionally guaranteed pensions of state workers. That state surplus wasn’t really a bonus, but rather a much-needed Band-Aid for some of the state’s promises.
About half of the surplus will go to the state’s least-funded pension fund. That KERS fund covers pensions for most state workers — excluding teachers, police and emergency personnel — and it is one of the worst funded pension systems in the country. By some accounts, it is already in a death-spiral.
$100 million may sound like a lot, but it will amount to less than one percent of what actuaries say that pension will eventually need.