Teacher Retirement Modernization Act

COMMONWEALTH OF KENTUCKY GENERAL ASSEMBLY BILL  XXXX

AN ACT to reform the Kentucky Teacher Retirement System (KTRS) by transitioning to a Defined Contribution Plan for active and future educators.

Section 1: Title This Act shall be known and may be cited as the Teacher Retirement 

Modernization Act.

Section 2: Legislative Findings and Purpose

(1) Findings: The Kentucky Teacher Retirement System (KTRS) currently faces over $17 billion [dollars] in unfunded pension liabilities, posing an unsustainable financial burden on [current and future] taxpayers. The existing defined benefit plan limits retirement asset ownership for educators [to the amount(s) defined upon retirement] and prevents opportunities for intergenerational wealth transfer. Transitioning to a defined contribution model will provide educators with greater financial security, ensure fiscal sustainability, and reduce the reliance on taxpayer bailouts.

(2) Purpose: To establish a defined contribution retirement plan for active and future educators that offers individual ownership of retirement funds, sustainable funding mechanisms, and enhanced financial security.

Section 3: Definitions

(1) "Active Member" refers to any individual currently employed in a teaching position and contributing to the Kentucky Teacher Retirement System. (2) "Defined Contribution Plan" refers to a retirement plan in which contributions are invested in individual accounts owned by the member, with retirement benefits determined by account performance. (3) "Employer Contributions" refers to taxpayer-funded contributions to an educator's retirement account. (4) "Investment Provider" refers to a financial institution managing individual defined contribution accounts, such as Vanguard or similar firms offering low-cost, low-risk investment options.

Section 4: Transition to Defined Contribution Plan (1) Establishment of Defined Contribution Accounts: Beginning [effective date], all newly hired educators shall participate in a defined contribution retirement plan in lieu of the existing defined benefit system. Active members of the Kentucky Teacher Retirement System may elect to transition to the defined contribution plan or remain in the defined benefit system. (2) Contribution Rates: Educators shall contribute 12.855% of their salary to their individual defined contribution account. Taxpayer-funded employer contributions shall equal 6.2% of the educator's salary. Combined contributions shall amount to approximately $834 per month based on the current average salary of $52,579. 

(3) Investment Structure and Growth: Contributions shall be invested in low-cost, low-risk funds, such as Vanguard’s High-Yield Corporate Bond Fund (ticker symbol VWEAX), or equivalent options with comparable performance and expense ratios. Investment earnings shall accrue directly to individual accounts, allowing educators to build a substantial retirement fund. 

(4) Retirement Account Rollover: Upon retirement, account balances shall be rolled over into a tax-advantaged account, such as an Individual Retirement Account (IRA), ensuring no immediate tax liability. 

Section 5: Benefits for Current Members (1) Retired Members: Current retirees shall experience no changes to their benefits, which will continue to be funded from the general fund. 

(2) Active Members: Active members who opt to transition to the defined contribution system shall receive a one-time buyout upon reaching retirement eligibility. The buyout amount shall be calculated as the total value of their accumulated contributions and earnings at the time of retirement. This buyout shall be fully funded through member contributions, employer contributions, and investment earnings from portfolio assets, with no additional reliance on the general fund. 

Section 6: Implementation and Oversight (1) Transition Management: The Kentucky Teacher Retirement System shall establish a transition team to oversee the implementation of the defined contribution system and ensure compliance with federal and state laws. 

(2) Financial Oversight: The Kentucky Auditor of Public Accounts shall conduct annual audits of the defined contribution system to evaluate financial performance and adherence to statutory requirements. 

(3) Reporting Requirements: The KTRS shall submit an annual report to the General Assembly detailing: Total contributions and earnings. Enrollment in both defined benefit and defined contribution plans. Performance metrics of investment funds. 

Section 7: Effective Date This Act shall take effect on  allowing for a  period for preparation and stakeholder communication. 

Section 8: Severability If any provision of this Act is found to be invalid or unconstitutional, the remaining provisions shall remain in full force and effect. 

Section 9: Repeal of Conflicting Laws All laws or parts of laws in conflict with this Act are hereby repealed. 

Section 10: Emergency Clause Due to the urgent need to address Kentucky’s pension liabilities and ensure the financial security of its educators, an emergency is declared, and this Act shall take effect immediately upon its passage and approval by the Governor.