KY’s teacher pension fund just added $3 billion in unfunded liabilities. Here’s how.

The Teachers’ Retirement System of Kentucky on Monday approved a new set of assumptions about the future that will add $3 billion in unfunded liability to its books and require as much as $200 million more annually from the state budget.

The TRS Board of Trustees approved recommendations from an experience study intended to set more realistic numbers for its assumed rate of investment return (that’s dropping), the payroll growth of educators (that’s also dropping) and the life expectancy of its retirees (that’s rising).

TRS orders an experience study every five years to be sure it’s making stable financial assumptions based on reliable data, Gary Harbin, the agency’s executive secretary, told the trustees.

The $20.5 billion TRS provides retirement benefits to 56,629 retired Kentucky educators, with 73,151 more educators actively enrolled. School teachers in Kentucky are not eligible for Social Security retirement benefits.

State leaders in Frankfort have debated over teacher pensions for years. Last winter, the General Assembly passed House Bill 258, intended to change the retirement benefits for teachers hired after Jan. 1, 2022. The bill will require teachers to make larger contributions and work at least 30 years instead of the current minimum of 27 years.

Instead of a traditional pension, new teachers under HB 258 will pay into a hybrid retirement package that pairs a defined-benefits plan with a defined-contributions plan. Benefits would be enhanced if they work to age 65.

The actuarial changes approved Monday by the TRS board will reduce the agency’s funding level from 58.4 percent to 54 percent, raising its unfunded liability ratio from $14.78 billion to $17.73 billion, according to a presentation made to the board.

Pension contributions already consume a large part of Kentucky’s $11.9 billion General Fund. The state budget that begins July 1 will include $579 million in state contributions for TRS, a sum that was set to increase to $629 million in the following fiscal year.

Additionally, the state pours more than $1 billion annually into the ailing pension fund for state workers, which is operated by the Kentucky Public Pensions Authority.

Between the demands of the two pension funds, the amount of money available for most other state services is shrinking, observers say.

“Kentucky’s pre-pandemic budgets ... included sizable spending cuts in many state functions including higher education and various social services, to support offset growth in other areas, most notably for pensions,” Fitch Ratings noted in an analysis last month.

“Kentucky’s ratio of net pension liabilities and debt to personal income, at 19.9 percent, versus the U.S. states median of 5 percent, is among the highest for a U.S. state,” Fitch Ratings said.

The TRS board approved recommendations on Monday that will lower the assumed rate of return on the agency’s investments, or its discount rate, from 7.5 percent to 7.1 percent. Assumed payroll growth for its members will drop from 3.5 percent annually to 2.75 percent.

The formula for life expectancy will be changed to reflect Americans living longer generally but also teachers as a specific group tending to be better educated and healthier, Harbin said. A retiree who lives longer will collect more benefits in retirement, Harbin said.

“For example, a 60-year-old today may be projected to live to 81, whereas a 20-year-old today may be projected to live to 84,” Harbin said. “That doesn’t mean we’re going to be paying out more benefits to members than they would have gotten otherwise. This just means that we recognize that the benefits that they’ve earned will be paid longer.”