Archive for Wednesday, September 23, 2009

Report says KPERS needs overhaul to remain solvent

KU report says state’s pension system for public employees is ‘bankrupt’

September 23, 2009, 2:28 p.m. Updated September 23, 2009, 7:59 p.m.

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— The recession has made the long-term funding problems for Kansas’ public pension system severe enough for a recent report to declare it “bankrupt.”

Democratic Gov. Mark Parkinson isn’t as pessimistic, and the Kansas Public Employees Retirement System says no current retirees’ benefits are in jeopardy. But they acknowledged Wednesday the state must start soon to close an $8.3 billion shortfall expected between KPERS income and expenses over the next 25 years.

The report, released last week by the Center for Applied Economics at Kansas University, suggested the state should move toward 401(k)-style plans for teachers and state and local government workers. It’s ammunition for Republican legislators who’ve wanted to get away from plans with benefits based on salary and years of service.

“KPERS is bankrupt under current operating assumptions,” the report said.

The House Appropriations Committee expects to discuss KPERS during an Oct. 12-13 meeting. The KPERS Board of Trustees meets Oct. 15-16, and Parkinson’s administration has committed to considering proposals that don’t reduce retirees’ benefits.

“I don’t think he would go so far as to say KPERS is bankrupt,” Parkinson spokeswoman Beth Martino said. “We’re analyzing the situation and looking at all the options for fixing what appears to be a serious long-term problem.”

About $2.3 billion of the shortfall stems from investment losses last year.

But many Democrats and employee and retiree groups argue the state has never contributed enough money to KPERS to fulfill its long-term obligations. The state contributed $278 million last year.

“The employees have done nothing wrong in this,” said Dennis Phillips, a retired Topeka fire chief, now chairman of a retirees’ coalition.

State Treasurer Dennis McKinney, a Democrat and KPERS trustee, said employees probably would be willing to contribute more of their paychecks to pensions if the cost does not fall too heavily on them.

“If we all share in the pain, it’s a much more manageable problem,” McKinney said. “The first burden is on the state.”

The KU report said KPERS problems’ include methods for valuing assets that inflate their worth and projecting investment returns at an average of 8 percent a year. Glenn Deck, KPERS executive director, said both are standard for public pension systems.

But the report said a major flaw is guaranteeing benefits up front, regardless of investment earnings over time.

Arthur Hall, the center’s executive director, said it’s hard for KPERS to pin down the exact long-term cost of what it will owe in benefits. Also, he said, the current system allows state officials to promise good benefits now and let future officials worry about how to pay for them.

Supporters argue 401(k)-style plans result in higher benefits over time for employees, particularly younger ones, than the state guarantees now.

“We are in this situation because we have an antiquated retirement model for our state employees,” said House Appropriations Committee Chairman Kevin Yoder, an Overland Park Republican.

But others contend government workers sacrifice higher salaries for secure pensions, while 401(k)-style plans are riskier. Mark Desetti, a lobbyist for the Kansas National Education Association said legislators should remember that many retirees were hit hard by the recent downturn.

“These are the people who are going to end up on dog Kibble now, unless they have a major turnaround in the stock market,” Desetti said.

Comments

redfred 5 years, 8 months ago

As said before.

The economy is only part of the problem. The fact that the state has not contributed it's share for the last 12 plus years is also a major part of the problem. The legislature needs to accept responsibility for their part of the mess and take positive steps to correct it.

KU_cynic 5 years, 8 months ago

This is the biggest scandal in state government . . . and yet governor after governor and legislature after legislature has kicked this can down the road, essentially lying to both taxpayers and employees at the same time.

Shameful.

Jeff Kilgore 5 years, 8 months ago

Look, I've taught in Kansas for 26 years, and I could whine and kick like a baby, and there are times when I feel like it, but all of us who are future KPERS retirees must take stock of reality. First of all, people are living longer, much longer than KPERS was designed to pay. Secondly, KPERS cannot be faulted for bad investments. When powerful institutions lie, and when auditing is weak or fraudulent, then how can an institution invest with any professional confidence? If KPERS fails, I won't blame those in charge. I'll blame human nature, and I'll probably teach for 55 years instead of being able to retire at 55. Many of us in education are uneasy, but then we are in no different shape than people who have lost their entire investments.

If we don't ask those younger than us to pay more of a percentage of our retirement than we do now, then there will be a massive reduction in our retirement. Arkansas requires new teachers to pay 14% of their income. I don't know if that's fair or not, but what we pay now can't possibly pay for all those who are retired. Government will avoid this issue until it's too heavy for them to push out of their laps.

The only thing I ask is this: Is it fair to ask me to pay in to KPERS after I'm 55, when I've paid in for 30 years and will see none of it? Thank God I love teaching.

somebodynew 5 years, 8 months ago

@jkilgore - while I truly admire your attitude, you are overlooking the largest part of the problem. It is not just the investments that went bad. If you remember, there was a big investment scandal years ago -long before the economy as a whole went to cr*p.

But the other thing is that the legislature was required to put a certain amount in every year and for numerous years used that money to help with the budget. THEY are the ones that have created the current situation, by not paying in, when all the experts kept telling them this was coming. It is not like they weren't warned and the sudden economy took it all.

Matthew Herbert 5 years, 8 months ago

Here's a novel idea (as a KPERS victim for the past 4 years)....

Why can't I invest my own money AS I WISH, and should I screw it up (like the state has) it'll be my own fault and I can suffer the consequences of my OWN actions. Instead, my paycheck is taken involuntarily from me, invested without my input, and ultimately squandered with no plan of how to get that money to me when I ultimately do retire.

texburgh 5 years, 8 months ago

"We are in this situation because we have an antiquated retirement model for our state employees," said House Appropriations Committee Chairman Kevin Yoder, an Overland Park Republican.

Wrong, Kevin. The system works fine IF the employer pays its portion. The employer (in this case the state) routinely reduces their contribution when investments are up or raids the system when they need money. If the state had obeyed the rules, this problem would be minor even with the economic downturn.

"Arthur Hall, the center's executive director", AND THE KOCH-ENDOWED ECONOMICS PROFESSOR. Let's face it, Art Hall works for the Koch brothers and obeys them. When your study begins with a conclusion instead of a hypothesis, this is the crap you get.

As for 401-K plans - many people THINK they can beat the market and retire with more than a defined benefit plan but research conducted by Harvard says differently. Retirees are much better served by a defined benefit plan.

Socratic 5 years, 8 months ago

This is a state obligation. Whether they raise taxes, put in toll booths, or develop some other revenue producer like the lottery is up to them. KPERS hasn't even had a decent COLA increase in many years.

Shardwurm 5 years, 8 months ago

Simple really. Just raise taxes. That's how everything gets solved right?

Beyond that, raise them enough so even the worst teachers in the state make $150,000 a year. While this is well below what they're worth - as you know they're the most important people in your child's life - it would go a long way towards improving education right?

It's all about the money we throw at a problem. That's obvious.

yankeevet 5 years, 8 months ago

give me my KPERS money; i will invest it myself..........

Matthew Herbert 5 years, 8 months ago

shardwurm- Wrong. In what world do you live where teachers make 150k per year? We are a LONG way from that. As a teacher with a masters degree, and two head coach addendums, I still can't break 50k. In fact, the last time I checked (2008), Kansas ranked 38th or 39th nationally (Oklahoma worst, Connecticut best) in average teacher pay. That statistics were somewhat alarming; to even get to 25th nationally and be truly just average would require somewhere between an 8-10 k average per year teacher raise in this state.

KSManimal 5 years, 8 months ago

I just love how the legislature tries to blame teachers for the KPERS mess.

Here are the FACTS: TEACHERS have paid faithfully into KPERS all along. The legislature has consistently FAILED to pay their portion year after year. KPERS is bankrupt,...NOT because of the economy, but because the legislature did not pay their portion. All the calculations as to how KPERS would work, and remain solvent, were based on the assumption that the state would pay its share. THEY DIDN'T. And now they try to blame teachers.

Not that I'm surprised.

Charles L Bloss Jr 5 years, 8 months ago

Out of one side of their mouth they always say your benefits are safe, out of the other side the governor says he wants to cut our benefits. I do not believe that the benefits are safe, nor do I believe they will keep paying me until I die. Also, they should have a COLA every year, like social security used to do. You can plan for retirement, do everything right, and once you do retire sit back and watch everyone try to weasel out of paying you what they owe you. All of these people are crooks. If a report says KPERS is bankrupt, how can they executive director stand there and say your benefits are safe? I don't trust any of them. Thank you, Lynn

Jingal 5 years, 8 months ago

JKilgore; thank you for being a teacher.

The 401(k) vs. defined benefit concept is debatable from a philosophical standpoint, but not on the basis of individual economics. Eight years ago (the last time the stock market declines created KPERS losses/headlines) the idea was being pimped by the large mutual fund factories on a nation-wide basis, even in Topeka. Most of the really egregious claims (i.e., everyone would be richer, the process is more efficient, etc.) were thoroughly discredited and the movement lost momentum as the market recovered in 2003. Some states that made the switch or offered the switch (Nebraska, Michigan, Florida) found the process to be a failure at several levels (employee interest, savings efficacy, and immediate financial relief).

However a defined contribution (like a 401(k) plan) versus a defined benefit plan does alter the risk/reward sharing equation, which is what makes it a viable long-term political/philosophical debate (i.e., who should be responsible for the inherent risks; the employer or the individual?).

Regardless of your feelings on self-direction and the government's role in retirement, the fact remains that switching to a defined contribution plan (401(k) or otherwise) would NOT alter KPERS' current obligations or the near-term financial challenges. As such it's a total canard as regards the current issues.

Like many things, there is unfortunately no quick and easy fix. For myself, I'm a lot less worried about receiving my benefit than I am about broader issues. Like a Legislature that can't see past the next election, or a media outlet that is so intellectually lazy.

Nothing sells papers like stirring up the retired folks (except maybe another KU athletics scandal, of course)! And I guess since I have a mortgage obligation that is greater than the money I have on hand, I'm bankrupt too. I wish I had sixty-cents on the dollar in reserves. It's a good thing I have a few decades to scrape up the cash.

KU_cynic 5 years, 8 months ago

Jingal:

Some good points, but the last anology is a poor one.

Having a mortgage balance is not bankruptcy because your lender is confident that your future income will be more than sufficient to allow you to repay. In other words, the present value of your future income far exceeds the outstanding mortgage balance. If you keep earning an income and making your mortgage payments your balance will go to zero.

That's not the case for KPERS. The present value of future obligations (forecastable on the basis of employees, salary structure, pensions promises, and demography) far exceeds the the current money invested and the present value of future inflows of employee and state contributions. If the state and employees keep contributing as anticipated KPERS will run out of money -- unless investment returns are outlandishly high. Something has to give.

Jingal 5 years, 8 months ago

Good point on the mortgage analogy.

To extend your analysis, however, what if the income and resources upon which my mortgage loan was predicated were solely from the earnings on and value of my investment portfolio (which was invested in the broad capital markets)? In 2008 my income was negative and my account value took a major hit. If at that point the bank projected my ability to pay the entire balance of the loan based soley on the 2008 metrics, I may indeed be bankrupt (i.e. the present value of my future earnings and resources would be insufficient).

KPERS is similar, in that its ability to pay benefits is driven overwhelmingly by future earnings, not contributions. Earnings, however, fluctuate along with market returns. The long-term average is indeed used to measure the future assets, but in the case of 2008 the point of measurement was made after an extraordinary draw-down in values, and thus future earnings were projected forward at a much lower asset level.

Whatever the asset balance is at the point of measurement is assumed to exist into perpetuity, earning the acutuarial assumed rate. If it's bad, it's assumed to stay bad forever; in other words, there is never a year where earnings are greater that the assumed return. When earnings are above average (producing new assets), these new resources are projected to exist forever, with compound earnings into perpetuity. There is never an assumption that there will be a negative earnings year.

For this reason, the measurement point is always just a guage on where the plan is. Unless you know what the future holds, it is irresponsible to say the System is bankrupt. That was what I was trying to say by way of my analogy, although as you point out it was insufficient.

Having said that, It is equally irresponsible to say the System can afford to skip required contributions (a contribution holiday) or to increase benefits (grant COLAs, offer ad hoc benefit increases, etc.) when things 'look' good. But that is just what has gone on in Topeka and Capitals like it all around the country.

The only thing really unique about Kansas is they haven't even made the required contribution in nearly 20 years, selecting instead to 'build up' to that level with small incremental increases. This decision made KPERS even more susceptible than most Systems to the boom/bust measurement mentality, in that KPERS plays the same game but from a more precarious financial position. Thus when things are great, the long-term funding issues don't make good headlines. And when times are bad, the sky is thought to be falling (i.e., they're bankrupt).

Sorry for the length but I think you've uncovered an important and often overlooked distinction.

Godot 5 years, 8 months ago

Deck admits that projections were based on a solid return of 8 percent per year, for a fund that REQUIRES prudent investment.

Prudent investment over the last ten years yielded less than 4 percent per year. The difference between 8 percent and 4 percent ROI is huge. In other words, Deck has been cooking the books. He has lied. He has defrauded KPERS pensioners by using unrealistic assumptions on the growth of the fund's investments.

His, and Parkinson's, rationalization that "the other pensions assume 8 percent" is not an excuse. I have heard better than that from teenagers. "The other pensions" are also bankrupt.

Deck is guilty of not using his brain. Parkinson is guilty of not having a brain.

Parkinson and Deck should be removed from their posts,and should be indicted for fraud.

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