Topeka Moving to a 401(k)-style plan for Kansas teachers and government workers could slow efforts to eliminate the state retirement system’s long-term funding problems, according to a report released Monday that also shied away from taking sides in the Legislature’s debate over pensions.
The report, prepared by actuaries for the Kansas Public Employees Retirement System, projected lower long-term costs for the state under legislation approved by the Senate last month than under a bill passed by the House, also in March. The report also said the House plan could lower monthly benefits for retirees.
Three senators and three House members must reconcile their chambers’ differences and opened negotiations Monday. The House’s pension bill would put public employees hired after June 2013 into a 401(k)-style plan, while the Senate’s legislation calls for a commission to study that idea and others.
The state pension system projects a $7.7 billion shortfall between anticipated revenues and benefits promised to public employees through 2033. Legislators expect to pass a bill addressing those long-term funding woes after they reconvene Wednesday to wrap up business for the year.
Leaders of the House’s Republican majority see a 401(k)-style plan as important to solving the pension system’s problems because such a plan would tie retirement benefits to investment earnings. The state’s traditional plans guarantee benefits up front, based on a worker’s salary and years of service — and long-term funding shortfalls develop when revenues don’t keep up with the promises.
But the new KPERS report said starting the 401(k)-style plan adds some costs even as the state closes the long-term funding gap in its traditional plans, helping to make the gap in the state’s and local governments’ costs between the House and Senate plan about $1.2 billion through 2033. Still, KPERS officials declined to say whether the House or Senate plan is better.
“There are pros and cons they’ve got to weigh,” said KPERS Executive Director Glenn Deck.
House Pensions and Benefits Committee Chairman Mitch Holmes, a St. John Republican and his chamber’s lead negotiator, went into the talks promising to hold out for a 401(k)-style plan. He didn’t back away after seeing the new numbers from KPERS.
“I think we need time to digest them,” he said.
Sen. Jeff King, an Independence Republican and his chamber’s top negotiator, said the numbers reflect a need for lawmakers to “move at a deliberate pace” — supporting a study commission.
But the report’s message seemed clear to public employee and retiree groups, which oppose moving toward a 401(k)-style plan.
The report said a worker retiring after 30 years of service, with benefits based on a salary of $40,000, now would be guaranteed $1,750 a month. The report projected a monthly benefit for the same worker of just over $1,100 under the House’s 401(k)-style plan — though KPERS officials cautioned that the figure was based on pre-retirement investment earnings averaging 7 percent a year, lower than what KPERS assumes for itself.
“The Senate plan is head and shoulders above the House plan,” said Terry Forsyth, a lobbyist for the Kansas-National Education Association.
But supporters of moving to a 401(k)-style plan argue the state can’t afford to sustain its traditional plans indefinitely. GOP Gov. Sam Brownback predicted last week that even a study commission would recommend at least offering a 401(k)-style option to new hires.
Both chambers’ proposals do commit to higher annual state contributions to KPERS. The Senate’s bill would boost the state’s annual contribution to KPERS by $23 million, starting July 1, 2013. The House plan raises the annual contribution by about $10 million.
And the Senate’s legislation also would require most public employees to pay a higher percentage of their salaries into KPERS.
The House plan not only would make the 401(k)-style plan mandatory for teachers and government workers hired on or after July 1, 2013, it would cut the future benefit of other workers who chose to stay in the state’s traditional plans.
The KPERS report said the increases in the state’s contributions to the pension system wouldn’t be permanent after the long-term funding gap began to close. Under both the Senate and House plans, the state and local governments ultimately would spend less through 2033 than it if made no changes in the pension system and tried to close the funding gap with only higher contributions.
The report said ultimately, the state and local governments would save $3.6 billion on its contributions through 2033 under the Senate plan and about $2.4 billion under the House plan.