Kentucky Teachers Want A Taxpayer Bailout

Authored by Troy Vincent via The Mises Institute,

The Kentucky state workers’ pension system is by some measures the worst funded pension in the entire country with an estimated $70 billion dollars of unfunded liabilities. A recent audit of the pension system found that the plan has had $6.9 billion in negative cash flows since 2005.

At $40 billion, Kentucky teachers make up the largest portion of this unfunded liability. But even in the face of impending insolvency, many teachers in Kentucky are still protesting the slightest changes and cuts to their compensation that have been proposed in an effort to prevent catastrophe.

A minor reform bill recently signed into law that Governor Bevin admits “doesn’t come close” to solving the pension crises, and in no way changes current worker or past retiree’s pension or healthcare benefits, has been met with hysteria.

Many teachers and the Kentucky Education Association (KEA), the teacher’s union, are demanding the state raise revenue instead of cutting costs. The grand plan by the KEA and their lobby of teachers opposing pension reform is to take more money from those that are already responsible for paying teacher incomes - the Kentucky taxpayer. Instead of making concessions in an effort to fix their own underlying problem, they want a bailout. Not only would such a bailout set a very dangerous precedent, but for reasons I will explore below, it would be economically disastrous for Kentucky’s economy and private sector.

To put the $70 billion of unfunded pension liabilities in perspective, Standard & Poor's has ranked Kentucky's public pension as the worst-funded of any state in the US, with just 37.4 percent of the money it needs to pay obligations to retirees. Moody's has ranked Kentucky as having the third-highest pension debt when measured against a state's capacity to pay it off. With just over $10 Billion in total annual tax revenue for Kentucky’s General Fund, every state run institution and service in Kentucky would need to close for nearly 7 years just to fund past pension liabilities.

But despite this fact, the KEA and supporting teachers still insist that the state can somehow tax its way to solvency.

How Did We Get Here? The Moral Hazard of an “Inviolable Contract”

Over the past 30 years, and particularly in periods of unsustainable stock market booms, politicians from across the country sweetened government employee compensation packages by making ill-conceived promises. These promises, largely in the form of defined benefit pensions and health insurance, relied on market investments performing at levels that were wholly unrealistic. Kentucky was one such state, requiring a consistent near 8% rate of return annually to stay solvent. The problem was not, as the KEA and its supporters would have you believe, politicians using the money nefariously. In fact, the official audit of the pension plan stated that 23 percent of the growth in unfunded liabilities was due to the market underperforming the assumed rate of return. An additional 47 percent of the shortfall was found to be a result of making unrealistic actuarial assumptions and negative amortization caused by making inaccurate forecasts for state payroll growth. In layman’s terms, the financial assumptions made when projecting the plan’s ability to pay out were simply out of touch with reality.

In recent weeks Kentucky teachers have been calling in sick to hold protest rallies at the state capital, effectively striking, while entire school districts are forced to shut down. They condemn any cuts to their retirement benefits as a “broken promise.” Not only should the state honor their promise they say, but they must given that these benefits are part of an “inviolable contract.” So what is this magic “inviolable contract” that guarantees future payment despite having no money to pay out? Essentially, this “contract” is nothing more than a state decree supposedly guaranteeing public worker benefits no matter the financial circumstance. Which is, of course, an astoundingly ignorant economic proposition. As the saying goes, you cannot draw blood from a turnip.

With this problem growing for well over a decade, why then are teachers, the KEA, and politicians just now confronting the problem? The answer is quite simple: economic moral hazard. Neither the politician nor the teachers have any skin in the game. The creation of an “inviolable contract” which puts future taxpayers on the hook for promises made by past politicians is practically the textbook definition of an economic moral hazard. An “inviolable contract” with the state is a promise by politicians that government will extort whatever amount of income necessary from those in the private sector to make government workers whole. In this arrangement there is no incentive for teachers to keep an eye on the health of their own retirement. Why would a pensioner care to keep up with and address the problems as they have unfolded over the past decade if they are guaranteed government protection from the fallout? Obviously they would not and they did not. It was not until Governor Bevin was elected and began speaking honestly about the necessary budget cuts that teachers were impelled to action.

Beyond the simple fact that they are often years removed from political office before their grand plans turn into grand catastrophes, economics also explains why politicians make such unrealistic promises. The lesson is one of concentrated benefits and disperse costs. That is to say, a promise to teachers and state workers to sweeten their terms of employment is sure to gain the support of a large state worker voting pool. Meanwhile, the taxpayer which is busy trying to make a living in their respective field, has little time to assess and weigh in on such matters. In fact, up and to a point, the cost of engaging in this political process is more costly to the taxpayer than just forking over their additional portion in tax money to the lobby.

The Underpaid Kentucky Public Teacher Myth

More recently, teachers have begun not only protesting any changes to their retirement benefits, but also bringing attention to their claim that they are not paid fairly. Economically speaking, one could never actually know what the fair market value is for an employment arrangement that is forced upon the ‘buyer’ of the service, as is the case with public education. This claim also shows the KEA and supporting teacher’s unwillingness or inability to assess the value of their total compensation. After all, retirement benefits, hours worked, vacation days and salary must all be considered when honestly discussing compensation.

Based on Fidelity Financial’s retirement planning tool, an individual that works 27 years before retirement (the threshold for Kentucky teachers), earning an average $50,000 per year over the period, and that contributes to their retirement at the rate of Kentucky teachers (just over 9%) could only hope to have a yearly payout of just over $10,600 in retirement. When you compare this to the average Kentucky teacher pension distribution in retirement of $36,000 per year, it is clear that teachers are contributing very little to their own retirements and are compensated extremely well by taxpayers. If a teacher retires at age 55 and lives until age 85, this puts the taxpayers of Kentucky on the hook for $762,000 per teacher in retirement alone. This claim of “unfair pay” is especially suspect given that teachers in private schools average significantly lower incomes in terms of both salary and total compensation.

That said, Kentucky teachers do not do themselves any favor by bringing attention to even the salary portions of their compensation. Public teachers in the state, when adjusted for cost of living, are the seventh best paid public teachers of any state in the US with an average salary of over $52,000 per year. When you consider that Kentucky teachers work a total of 185 days, or just half the year, the figure is even more impressive. Put in terms of hourly compensation, Kentucky teachers earn roughly double that of the average worker in the state. This salary is even more staggering when put in perspective of the taxpayers of Kentucky’s ability to pay: Kentucky ranks 47th in the country for worker incomes, with a median income of $43,000 per year. This enormous disparity is undoubtedly unknown by the majority of Kentucky voters and taxpayers that succumb to the teacher’s emotional appeals of being shortchanged.

Moving Forward

Kentucky is currently ranked 33’rd of all states in the Tax Foundation’s Business Tax Climate Index, while neighboring Indiana is ranked 9th and Tennessee is ranked 14th. The only adjoining state to have a less attractive tax policy is Ohio. The KEA, teachers, and politicians coming to their defense are proposing to make the state even less competitive with our neighbors by advising to increase tax revenues instead of cutting costs. Not only would such a policy only serve to cover over the fundamental problem of making financial promises in retirement that are out of line with economic reality, but this sort of policy prescription puts the health of the entire state economy at risk. Individuals and businesses respond to higher taxes - they buy less, move here less, expand less, and hire fewer people. This is the underlying reason why simply raising tax rates does not always create more tax revenue, as people and companies move to more tax friendly states and avoid taxable activities. For those that think this is economic hyperbole or purely theory, just look to our neighbors in Illinois. The recent fallout from such policy folly has ultimately led to an exodus from the state.

If Kentucky is to prevent economic catastrophe and keep checks flowing to current retirees it can only be done by dramatically slashing spending and transitioning new and current teachers to a more private-sector-like compensation plan. Working for state government cannot both be more profitable than working in the private sector while also coming with zero risk of losing your job, having your pay cut or benefits renegotiated. Suggesting otherwise not only makes a mockery of the often referred to “public servant” but suggests that a young college graduate would be foolish to entertain work in the private sector that comes with far fewer benefits and far greater risks. The KEA and teachers unwilling to see cuts to their benefits are ultimately setting the stage for a long drawn out economic failure similar to that seen in Illinois, where individuals and businesses leave the state creating an ever smaller need for teachers and ever smaller pool of tax revenue. It is imperative to remember that the success of the private sector precedes the ability to have any employment in the public sector at all.

Comments

Troy Ounce Thu, 04/19/2018 - 13:42 Permalink

 

Funny: "A pension is a Promise".

  • I am a civil servant and I am here to help you
  • I promise I won't come in your mouth
  • The check is in the post. I promise

 

DownWithYogaPants jcaz Thu, 04/19/2018 - 14:38 Permalink

Dogs and honey??? 

Is that a variant on the old lonely girl with her dog and jar of Skippy?

Regarding Teechers: I never had one I thought was any good until I was in college and paying for it myself.  Public school teachers are the weirdest lot of oddballs you will find when you sort for profession.

In reply to by jcaz

FireBrander DownWithYogaPants Thu, 04/19/2018 - 14:42 Permalink

$70 billion of unfunded

LOL! That is after a decade of Market Pumping by the FED!

No doubt the invested funds are reaching for yield...probably full of Tesla stock and such...a 20% market correction should nail the coffin shut on this pension fund; they'd have to confiscate all income in the state just to fund the teachers pension.

In reply to by DownWithYogaPants

American Psycho Squid Viscous Thu, 04/19/2018 - 14:12 Permalink

I always knew the pension system was fucked, but did not realize how much until I started as a Research Scientist at a state university.  I had two retirement options, one that vested immediately, and one that required 10 years.  Choosing the immediate vesting option, the university ONLY contributed 9% of my annual salary to my retirement whereas I contribute 6%.  The other option which vests in 10 years would have contributed, I think, 15% of the salary to retirement. 

In reply to by Squid Viscous

InflammatoryResponse cougar_w Thu, 04/19/2018 - 15:30 Permalink

What is most interesting is that this has been going on for over 20 years.  (the screwing up of the teacher's etc. retirement plans)  and did the teacher's union bitch in the past?  no.  they kept donating to the idiot democrats that were screwing them over each year.  it is simply amazing.

 

why any teacher would send a nickel to the union is beyond me.

 

 

In reply to by cougar_w

serotonindumptruck dirty fingernails Thu, 04/19/2018 - 15:04 Permalink

Adding to this toxic mixture would be the corruption of the judicial system, where elected judges, prosecutors, and county sheriffs are placed into financially lucrative positions that are the equivalent of "the fox guarding the hen house".

All forms of government are predicated upon the veiled threat of violence if the citizens refuse to submit or comply with an arbitrarily determined authority figure.

In reply to by dirty fingernails

pissonmefico MARDUKTA Thu, 04/19/2018 - 15:26 Permalink

What Rahm Emanuel said - "never let a good crisis go to waste" cuts both ways: "they" should replace all these teachers with illegal alien spanish speaking only teachers since 95% of the students are their anchor babys anyway. Make it illegal for class to be taught in English. Then allow all illegal aliens to "legally" vote so that all state and local government positions (including police) will be held EXCLUSIVEly by illegal aliens - which they most assuredly will. Then go ahead and issue to the illegal aliens and every foreigner here "legally" who has no intention of ever going home or assimilating the millions of firearms and billions of hollow point ammo that was distributed to every government agency a few years ago. Who do you think they were intended for? - the fucking Mailman?

"They" whom control the U.S. through the total control of "their" fraudulent currency plan to finish destroying Christian America using this method but do not have the nerve to do it all at once. "They" must go bit by bit to prevent a constitutionally lawful revolution.

"They" should show their hand now before our time runs out. Kentucky would be a great place for a beginning with West Virginia and Tennessee next door. 

And "they" obviously include Trump. It was even obvious during the presidential campaign due to 24/7 media coverage and who his lifelong friends have been.

 

In reply to by MARDUKTA

Endgame Napoleon MARDUKTA Thu, 04/19/2018 - 16:05 Permalink

Teachers do not work part time, but according to two former superintendents of schools and one principal, teaching is a “good second income for a mom, and she can be home with her kids in the summer.”

Due to the crony-parent job  network in the USA, few teachers without spousal income are hired. If teachers do not get a raise, keep in mind that their paychecks are not their only source of income in most cases. 

Oklahoma recently had a similar protest, with teachers making $36k loudly demanding a raise, saying they had not seen a raise in 10 years.

Oklahoma teachers: Most private-sector employees in the USA have not seen a raise in 40 years, and many of them do not have benefits, either, including many college grads and multi-licensed staff in fields like insurance. 

Except for the coaches, almost all of my primary & secondary school teachers fell into that category: moms with spousal income. With few exceptions, they were not interested in the subjects they taught, nor were all of them good with other people’s kids. However, they were off in the summer to be with their own kids.

Some college professors—who are interested in the subjects they teach in all cases—teach during the summer, but many don’t. Research is often stressed over teaching in universities.

Although they mostly do not teach in the summer, the pay of teachers is spread over all 12 months, so mom-gang teachers do not work part time, unlike their mom-gang counterparts in the many discriminatory, “voted-best-for-moms” office jobs. 

Those office-job moms often work part time, officially, to stay below the earned-income limits for monthly welfare and the cut offs for refundable EITC child tax credits up to $6,431. Those are the moms in single-earner households. Other moms in office jobs staffed with 90 — 98% moms work part time, unofficially, in crony-mom back-watching arrangements, adding keeping-up-with-the-Jones’ income to a sizable spousal income in many cases.

Womb-less men and non-womb-productive women with no access to unearned income could do those jobs. Although many of them would be at work much more, generating and retaining more business, they are not the preferred employees. They do not have “somethin’ comin’ in” from spouses, ex spouses or government to boost up the low wages. 

Non-womb-productive employees cannot miss 5 minutes of work due to sitting in the same thicket of school traffic that parents navigate, but moms can miss 45 minutes in the mornings, likewise bounding out the door at 2:30 every day, and for multiple weeks of excused absenteeism beyond PTO and pregnancy leaves for things like travel soccer, heedless of phones ringing off the hook with paying customers.

Got a productive womb? You will not be judged on performance in an office job. Don’t have a productive womb? In most cases, good performance—i.e. generating a higher number of new-business sales and retaining a higher number of accounts than most of your colleagues—will not result in decent pay or even job retention unless your boss has seen zero birth-canal exits.

Teachers are mostly womb-productive, married moms, but they not judged by performance anymore than back-watching, absenteeism-gang moms in office jobs are judged by meeting the sales generation and account-retention numbers.

In office jobs, absentee mom managers can always churn non-absentee hard workers to keep the sales numbers up. Crony-parent managers almost always choose to churn the employees who are not “needs-the-money” parents. Crony-parent bosses almost never fire a fellow mom unless her absenteeism is all-day / every day absenteeism in a management position. 

Crony-parent managers nearly always choose to churn those who have one, earned-only income stream, with no spousal income, no child support that covers rent and no monthly welfare that covers rent and groceries. They choose to churn the employees who have no refundable EITC child tax credits up to $6,431.

They choose to churn the non-parents, even when the childless employees are the ones who come to work every day, stay all day and meet the quotas every month. 

Although a lot of substitute teaching is done for some reason, teachers do not get away with the same degree of absenteeism as the office moms, but they should be held to quotas, involving things like the number of kids taught to read, the number of kids taught to write a coherent English sentence and the number of kids taught to master basic math. 

Since I am not a “needs-the-job” crony parent, I have worked a lot of temp jobs, including several sessions grading standardized tests from all over the country for $10.40 per hour.

After reading hundreds of thousands of papers from 4th — 8th grade students, I, an underemployed, working-aged person, along with the many retired school teachers who worked this temp gig, was agog at the huge number of kids who could not write even one coherent paragraph in a standardized test. 

Teachers want a raise, really? In most of my jobs, my income between $20k and $25k, with regular commission paid only sporadically even when I met the quotas every month, and most of my jobs had zero benefits.

Regardless of the fact that I could not afford an apartment on the pay, the pressure to meet quotas was relentless, not that busting my can to meet the quotas resulted in any reward in most cases. 

Most primary and secondary school teachers do not have any more education than I and many college-educated colleagues, working for $25k base pay, have, and furthermore, primary and secondary school teachers almost always have a second income due to the discriminatory hiring preferences in their profession, which openly favors “moms who can be at home in the summer with their kids.”

In reply to by MARDUKTA

Cloud9.5 AllTimeWhys Thu, 04/19/2018 - 14:07 Permalink

Well, let’s compare notes.  I taught for 33 years.  I can weld, run a mill and a lathe, temper brass and steel, reload, cast my own bullets, drive a truck, fly a plane, scuba dive, wire a house, pour concrete, lay tile, frame windows and doors, paint, rebuild an engine, plant a garden, butcher a hog, hunt and fish, just to name a few.  You are up.  What can you do?

In reply to by AllTimeWhys