Topeka A commission agreed Wednesday to consider proposing that Kansas start a 401(k)-style pension plan for new teachers and government workers, but members also expect to mull over a less aggressive alternative that creates such a plan only for higher-wage employees.
The pension study commission also promised to discuss other ideas for improving the future financial stability of Kansas’ public pension system. The possibilities include issuing up to $5 billion in bonds to close a long-term gap in the system’s funding and additional increases in the state’s contributions to retirement benefits.
The Kansas Public Employees Retirement System projects a gap of nearly $8.3 billion between anticipated revenues and the benefits promised to retirees through 2033. Earlier this year, legislators committed the state to increasing the tax dollars it contributes to the pension system and approved changes to force public employees to choose between contributing more of their paychecks to their pensions or accepting lower future benefits.
Many legislators presumed the pensions study commission would draft a proposal for a 401(k)-style plan or a hybrid system when lawmakers created the group earlier this year. The state’s current plans guarantee benefits up front, based on a worker’s salary and years of service, rather than basing retirement checks on the pension system’s investment earnings, something common with businesses.
The debate pits Gov. Sam Brownback and his Republican legislative allies pushing for a 401(k)-style plan for new employees against public employee groups, which oppose the idea. Critics fear a 401(k)-style plan or even a less aggressive alternative will provide less generous and less secure retirement benefits for new hires, without making a dent in the funding gap.
“On the discussions we’ve seen so far, we haven’t seen them address the gap,” said Terry Forsyth, lobbyist for the Kansas-National Education Association teachers’ union. “There’s just nothing here that we can put our arms around.”
The pension changes approved by legislators earlier this year won’t take effect unless the study commission drafts a plan by the end of this year and legislators consider the recommendations by June 2012.
The law that created the commission also raises the state’s annual contribution by about $15 million in July 2013, ramping up the increase to $95 million as of July 2017. Changes in workers’ pension plans would take effect in 2014.
Brownback contends the state can’t sustain its current pension system, known as “defined benefit” because benefits are guaranteed up front, regardless of the system’s revenues and investment earnings. A 401(k)-style plan is known as “defined contribution” because contributions but not benefits are fixed.
Five legislators serve on the 13-member study commission, and Brownback appointed another five members.
“I’m pushing for a defined contribution plan on a going-forward basis,” Brownback told The Associated Press in a brief interview Wednesday. “You’ve got it at a point where people are ready to make a decision on it.”
As an alternative to a pure 401(k)-style plan for new hires, the commission will consider a “stack” plan for new hires, in which the first part of a worker’s salary, from $50,000 to $80,000, is covered by a traditional plan and the rest, by a 401(k)-style plan.
Public employee groups and many legislators argue that KPERS faces long-term financial problems because the state has historically shorted its contributions. The commission will consider a proposal that would prevent the state from doing so in the future, though it would dramatically increase tax dollars going into KPERS instead of public schools, social services and other programs.
There’s also the option of issuing bonds, anticipating that earnings from investing the funds raised will outstrip the payments on the debt, while giving KPERS an infusion of cash to close the long-term funding gap.
The state tried it in 2004, issuing $500 million in bonds, but the long-term funding gap still jumped because of investment losses during the Great Recession.
The projected long-term funding gap for KPERS grew by almost 8 percent when the pension system released a new figure in July, jumping $587 million from $7.7 billion. However, the figure is an estimate for the end of 2010, before this year’s pension law was enacted.