Kentucky Calls for Redo of TRS Pension Bill Analysis

State budget director balks at report that says proposed reform plan will cost taxpayers billions.

Kentucky’s budget director is seeking a redo of Cavanaugh Macdonald’s analysis of the Teacher Retirement System (TRS) pension bill, after it reportedly said Gov. Matt Bevin’s reform plan would cost taxpayers an extra $4.4 billion over the next 20 years.

The reform proposal calls for shifting the pension participants from a defined benefit plan to a defined contribution plan. Cavanaugh Macdonald’s analysis said closing the defined benefit plan would require the TRS to alter its asset allocation and invest in more conservative options.

However, Bevin’s office said Cavanaugh Macdonald’s initial analysis of the current pension proposal uses assumptions that are very different from those in its annual valuation reports, including “significant changes” in retirement patterns and an investment return assumption “very different” from the rate recently approved by the TRS Board.

“It seems to me that your report is incomplete and non-compliant with your profession’s standards, as it did not include an explanation of the rationale,” wrote State Budget Director John Chilton in a letter to Cavanaugh Macdonald principals Edward Koebel and Cathy Turcot. “It did not include a reference to any studies or analyses that led to the change in assumptions, nor did it include a disclosure of the general effects of the change in retirement rates.”

Chilton has asked Cavanaugh Macdonald to “rectify this deficiency” by explaining their rationale that:

  • All employees already eligible for the 27 years of service or age 60 with five years of service would retire at the end of the three-year extended period, during which those teachers would continue to benefit from the defined benefit provisions.
  • 100% of active teachers with less than two years of service on July 1, 2018, will elect to participate in the new defined contribution plan.
  • All other employees who have more than two years of service but not yet eligible would immediately retire on meeting the threshold.

The governor’s office also said that although the statutes require a 20-year analysis, Chilton will request the analysis be extended to 30 years so that the long-term effects of the pension proposal can be modeled within the 30-year amortization period contained within the proposed legislation. 

“In the past, a lack of realistic and rational actuarial assumptions helped obscure the distressed financial status of the plans and contributed to the long-term unsustainability of the plans,” said Chilton in a statement. “We will ask Cavanaugh Macdonald to prepare calculations with several alternative assumptions so that policy makers can make informed decisions based on scenarios that include realistic assumptions.”

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