Kentucky Pensions – Know the facts Kyle Estes, HCSD Superintendent

Funding ratio – Kentucky pensions INDIVIDUAL PENSION PLANS 16% State Non 59.7% State 59.0% CERS Non 57.7% CERS 30.3% 54.6% 72.1% 85.1%

Pension unfunded liability (06/30/16) (Stated in Millions)

Retirement points Liability is the Issue of a Long-Standing Process of “Kicking The Can Down the Road” that Spans Multiple Administrations and Both Political Parties State Leadership appears focused on “Shifting the Risk” to the Employee (i.e. A Corporate America Model) Deep Concern for The Resulting Public Policy that would be Enacted: Recruitment of Staff Retention of Staff Age Issue Created with Staff Quality of Service Issues Created with Staff “Solutions” per PFM Do Not Address the Real, Current Issue of Unfunded Liability and Plan Solvency Inviolable Contract – Legal Protection for The Promise Made To Public Workers (KRS 61.692). “Prohibits retirement benefits from being reduced, altered, amended or repealed”.

C E R S – COUNTY EMPLOYEES Ret. System Approximately 50% of Public School Employees Are CERS Plan Participants This Plan includes School Boards; Cities; Counties; Municipals in Kentucky EmployEE Contributes 5% of Wages; EmployER Contributes 19% of Wages No State Funding Provided! 100% Employee / 100% Employer Contributions 59% Funding Ratio Toward Unfunded Liability – Highest Funded Ratio We Already Have a Tiered Approach Installed (Hybrid Plan) Also Participate in Social Security (Not Their ONLY Retirement Income)

C E R S CERS is currently a part of KRS (State KERS Plan and State Police Plan) CERS has 63% of Members in Total KRS Plan CERS has 73% of Assets in KRS Total Plan CERS pays for more of the KRS Admin Costs Than Other Plans Admin Costs are Higher than Comparable Systems (And Increasing) CERS (until recently) had NO representation on KRS Investment Committee Representation on Investment Committee is not Proportional

C E R S CERS is Vastly better funded than State Plans (59% vs. 16%/30%) CERS is ‘Guilty by Association’ with KRS Plans Financial Status CERS needs 100% Control of Their Plan; Remove Politics from System; Stability in Management; Avoid Unnecessary Benefit Changes SUPPORT Independence of CERS from State Plans !!!!

TRS – teacher retirement system TRS created to be a Social Security Replacement Plan (exempted from SS) TRS provides COLA’s that mirror Social Security COLA’s are pre-funded; not an issue with the Unfunded Liability 1930’s - Created as it was more secure and less expensive than SS Movement to SS/401k would be More Expensive for Taxpayers; SS provides less control whereas TRS allows for Local KY Control of the Plan; Less Benefit for Retirees; Destructive to Public Education Shared Responsibility Plan is Better Alternative (see health insurance solution)

Is TRS Management part of the problem? Quick Answer: “NO” it is Not Part of the Problem TRS has operated one of the most efficient retirement systems in America TRS provides one of the best returns on investment as compared with other retirement systems in America Let’s Prove This with The Facts!

TRS Expenses vs. Other Systems As of June 30, 2015 Percentage of Assets Kentucky Teachers 0.0556% Kansas Public Employees 0.0675% New Mexico Public Employees 0.0693% Georgia Employees 0.0921% Louisiana Teachers 0.0797% Ohio Teachers Retirement System 0.0852% Indiana Public Employees 0.1644% Like the investing cost is low, this shows you that the administrative cost for TRS is among the lowest in the country. Ohio is the only other one on this list that provides medical coverage. *Only Ohio also manages health insurance program

Fiscal 2017 preliminary gross investment return Did You Know? Fiscal 2017 preliminary gross investment return 15.37 percent Among the best returns in the country (Top 7% Nationally) READ Net Return is 15% after expenses Double-digit percentage gains in 3 of the last 5 years & 5 of the last 8 years 11

TRS pays: $166 million in retirement annuity benefits (July 2017) $24 million in medical benefits (monthly average) 89% of TRS retirees live in Kentucky Retired teachers would make TRS the second- largest employer in many counties About $1.8 billion a year paid into Kentucky’s economy because of pension benefits Every $1 of TRS Pension Benefit Returns $1.43 back to local economies Retired teachers has significant economic impact in every Kentucky county Real economic impact. It’s no surprise to this group what an immense impact you have across the entire state as a result of the benefits you earned from TRS as a result of your lifetime of service to the state, its schools and its children.

Average retirement age 59 Here’s a statistic that might surprise you. For the most recent fiscal year, the average retirement age was 59. That excludes the disability retirements. As you see, less than 5 percent of people retire before age 50 and four times as many retire at 65 and over than retire under 50. The average career teacher works more than 30 years. You can see the impact of the high-3 provision because the bar showing 55-year-old retirees is the highest. Retirement rule changes could alter which bar is the highest and the average retirement age.   Less than 5% retire before age 50 4 times as many people retire at age 65 & over than under age 50 Average career teacher retiring in FY 2017 worked more than 30 years

8.1%. INVESTMENT PERFORMANCE TRS Gross Returns 10-year Top 9% 1-year As of June 30, 2017 Preliminary 1-year 3-year 5-year 10-year Returns 15.37% 6.3% 10.1% Rankings Top 8% Top 11% Top 13 % Top 9% TRS Ranking Compared to Public Pension Plans in the Nation Provided by Aon based on gross returns Here are the investment numbers we mentioned at the beginning, broken down by timeframes. The rankings are based on large pension plans as analyzed by Aon. First, notice that 15.37 percent return for the last year. Second, note that TRS is among the top 8 percent of pension plans for the one year and the top 9 percent for the 10-year. The most important number is that TRS is at 8.1 percent over 30-years, and that’s above our 7.5 percent assumed rate of return – we’ll talk more about that in a minute. Lastly, smaller timeframes show volatility. That 10-year number, of course, includes the worst economic event in history since the Great Depression. Look at the difference you see between that number and the 10.1 percent for the last five years. The compounded gross return for the last 30 years is 8.1%. 14

More Did You Know? 58% of retired teachers received $40,000 or less in Fiscal Year 2017; No SS income supplement. 90% of retirees receive $60,000 or less Fewer than 1% of retirees (0.8%) receive more than $100,000 TRS replaces Social Security Retirees receiving between $20,000 and $40,000 worked an average of 27 years. People receiving higher pensions also worked longer   Notes: Excludes disability retirement payments. In simpler terms, what the chart shows is 58% of retired teachers received $40,000 or less in Fiscal Year 2017, again receiving no Social Security. 90% of retirees receive $60,000 or less. Fewer than 1% of retirees (0.8%) receive more than $100,000. Those folks contributed the same percentages of pay as you, generally had high salaries and averaged about 35 years or more. If you want to compare these benefits to other types of retirement vehicles, take out about $16,000 that would be the average a Kentuckian would get from Social Security. Other takeaways: Retirees receiving between $20,000 and $40,000 worked an average of 27 years and People receiving higher pensions also worked longer.

Additional Funding Summary TRS Requested $1.03 B Approved $973 M 94% On the pension side, the investment performance by your TRS investing staff was aided by the first year of additional appropriations from the 2016-2018 budget. About half of that $973 million came in during the just concluded fiscal year and the rest of it will come in over the next fiscal year. The impact of this is huge and be sure to thank your legislators and the governor for providing it in the last state budget.

T R S PFM Proposes Combining Investments of ALL Pensions By combining funds under one appointed Board, a relatively small amount of savings would be achieved. All of our Assets would be in one basket! Very Risky! Lose Control Over Direct Management of Teachers Retirement Plan We Currently have a Shortage of Teachers without Losing Pension Benefits Local Districts make SS Match? – Enormous Cost / Taxation…Why Push the Passage of Required Tax to the Local Level? Becomes a Question of “WHO” passes the TAX, NOT “IF” Additional Taxes are Levied to Pay for A More Expensive Solution

T R S Since 2008, Legislature has not funded TRS requested ARC funding totaling $1.9 Billion TRS has had to sell investments to meet liquidity needs due to no ARC payments by the State. The compounded amount between no ARC funding; lost returns; and sale of assets is computed to be $3.8 Billion This ALONE would have reduced the unfunded liability from $14.6 Billion to $10.8 Billion, raising the Funding Ratio from 54% to 66%. The National Average for Pension Plans is 73%. This Would put US Within Striking Distance of The Avg Benchmark Social Security has an unfunded liability of $12.5 Trillion or $38,000 per household vs. $3,300 per household of the current TRS unfunded liability. Social Security option is IRREVERSIBLE once Declared. A Decision to Move Teachers to SS is PERMANENT with the Federal Government.

T R S SS Cost more (PFM page 16); Doesn’t resolve the current unfunded liability; Bad for Teachers; and is a Irreversible decision (HIGH STAKES MOVE!). Federal Gov’t Highly Likely will Increase Social Security Tax on both the Employer and Employee in the near future (1.5% each; 3% total). The Increased Tax Would Make this Even More Costly Than it Currently is for Teachers and Taxpayers as Opposed to TRS A Move to Social Security Means We Lose Total Control of the Pension Plan, Permanently. We Support A Shared Responsibility Plan is THE BEST OPTION to Repair TRS and Sustain This For the LONG-TERM !!!!! State Employees Retirees

Page 16 – PFM Report (Report 3) TRS is 12.855%