Gov. Brownback appointed me to be a member of the Kansas Public Employees Retirement System Study Commission, set up to make recommendations on the financial stability of KPERS. Our meetings are completed. What did we accomplish? Nothing positive. Raised costs. Increased complexity. Kicked the can farther down the road. In other words, political gamesmanship won, and the taxpayers and state employees in Kansas lost.
KPERS is $9 billion in debt, a debt owed by taxpayers. To put that into perspective, the Kansas budget is $5.5 billion. And what is this debt for? To fund the retirement benefit for government employees.
The law for funding KPERS (HB 2194) obligates the state to pay, on average, over $900 million per year. This year, taxpayers will contribute $367 million, so taxpayers need to almost triple their contributions to the employees’ retirement plan. The Kansas Association of School Boards says we are already taking money from the classroom to fund this benefit. But nowhere near as much as we will in the future.
KPERS is in bad shape for two big reasons. First, the Legislature chose to underfund the plan for many years, spending the money on other things.
Second, state employees are allowed to retire with full pensions as early as age 52. Their pensions pay lifetime benefits, potentially 30 years or more. Two different actuaries told us early retirement was the single biggest cost to the pension system. Did we do anything about this? The only proposal addressing it was defeated.
Gov. Brownback’s appointees probably made 75 percent of the recommendations. Most were either not acted on, or were defeated. For example, one proposal would have changed the vesting requirement from 5 years back to 10 years, where it was until 2 years ago. When it changed, KPERS was already significantly in debt. Allowing earlier vesting increased the debt. Who did this change benefit? Legislators who might not serve 10 years. And employees who work for the state, and then take their career a different direction. Forty-five percent of employees leave before the 10-year point.
So that change only benefitted short-term employees, who are now eligible to receive monthly retirement benefits for the rest of their lives. The actuary said this change would save $37 million. KPERS said this was “not significant.” In my world, $37 million is very significant.
This proposal was defeated.
So I am recommending to Gov. Brownback that he propose an immediate across-the-board 25 percent state income tax increase to pay the shortfall in employees’ retirement plans. The KPERS Study Commission decided against cutting the spending. I refuse to recommend taking more money from our children’s classrooms to pay this bill. The only remaining option is a tax increase.
I’m sure KNEA and KOSE and the other employee unions will aggressively support this proposal, since they have claimed loudly (wrongly, but loudly!) that the only reason the employees’ pension plan is underfunded is because the Legislature chose not to fully fund it. And since those same unions also claimed loudly (also wrongly, but just as loudly!) that if we just follow HB 2194, the plan will become fully funded in 22 years. The 25 percent across-the-board tax increase is the amount of money needed to fund the plan per HB2194.
This doesn’t have to be a union vs. taxpayer issue. Between the union and the Kansas Legislature, no one has the guts to do what is needed to fix this. But there is a middle ground. The current plan is unsustainable. The only thing that would save the current plan is if the stock market goes into a ’90s-type bull market. Anything short of that, and the plan gets worse.
Through 12-14-2011, the stock market is up 1.3 percent. Since KPERS is based upon an 8 percent assumed rate of return, earning 1.3 percent this year is equivalent to losing 6.7 percent.
If the unions don’t agree to modifying the benefits, eventually the plan will collapse under the funding requirements. $900 million a year? Wow! Taxpayers who have no pensions are objecting to paying higher taxes for someone else to have a pension.
Now that this commitment is over, I need to get back to my real job. As I understand it from the unions, this commission failed because the financial planners on the commission were trying to benefit personally from the outcome. So I need to get my three-planner office geared up to handle 280,000 KPERS members as new clients. I might even have to work some overtime!