TOPEKA — A commission examining Kansas' public pension system still must tackle the daunting issue of closing the system's long-term funding gap, a task likely to prove expensive no matter what emerges from its discussions.
The pensions study commission is building on work by legislators earlier this year that produced the law creating the group, while committing the state to increasing its contribution of tax dollars to the Kansas Public Employee Retirement System. The law also will force public employees to choose between contributing more of their paychecks to their pensions and accepting lower future benefits.
Commission members plan to consider drafting a proposal to start a 401(k)-style plan for new hires or a less aggressive hybrid of that approach and traditional plans. KPERS plans guarantee benefits up front, based on an employee's salary and years of experience, rather than on investment earnings, as is common for businesses.
The debate over starting a 401(k)-style plan is contentious and pits Gov. Sam Brownback and Republican allies in the GOP-controlled Legislature against public employee groups. Yet bolstering the long-term financial security of KPERS will require the commission and legislators to consider other ideas likely to cause heartburn and complicate Brownback's push on other initiatives next year.
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The pension system projects a gap of nearly $8.3 billion between its anticipated revenues and the benefits promised to both retirees and current employees, through 2033. The commission plans to discuss committing even more state tax dollars to KPERS and issuing as much as $5 billion in bonds to eliminate what's known as the system's unfunded liability.
"Pay now or pay later, but you're still going to pay," said House Speaker Mike O'Neal, a Hutchinson Republican and Brownback ally who supports moving toward a 401(k)-style plan for new hires. "There's no magic pill that's going to fix the unfunded liability. There's going to be some tough love involved."
Brownback appears to be preparing an ambitious agenda for the 2012 Legislature. A task force is drafting a plan to overhaul the state's Medicaid program, to cut the costs of covering medical care for the needy, and a top aide recently discussed details of a coming plan on education funding during a gathering of school administrators. A task force is working on a plan to cut taxes.
Bolstering the state pension system also is on his list, but the governor was careful to say last week that he's waiting to see what the commission develops. He's said repeatedly that he favors moving toward a 401(k)-style plan.
The commission will consider not only that idea but also 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.
Backers of moving toward a 401(k)-style plan argue that doing so will help control the state's long-term costs, by tying benefits to the system's earnings. Also, they contend that many employees, particularly younger ones, will do better.
Public employee groups loathe the idea. They're skeptical — given experiences in the Great Recession — of claims that workers will do better and argue that their retirement benefits are likely to become less generous and less certain.
But the debate about moving toward a 401(k)-style plan is largely about the future, and whatever happens, the long-term funding gap from current plans must be addressed.
"I do want to make sure we cover how we pay for this unfunded liability," said Frederick Poccia, a study commission member from Overland Park with more than 30 years in the banking and financial services industries.
The latest estimate for the unfunded liability, released in July, represents the estimate at the end of 2010, before this year's law was enacted. The law is expected to reduce the gap, but changes for workers and the state's commitment of extra tax dollars won't be triggered unless the commission makes additional recommendations and legislators consider them by 2012.
And commission members still expect that, even if the law's provisions do take effect, a significant unfunded liability will remain.
Changes in workers' pension plans mandated by this year's law would take effect in 2014. The state would boost its contribution to KPERS by about $14 million in July 2013, ramping up the increase to $113 million in July 2018.
But even with those increases, the contribution could go higher still — and would, if Kansas law simply said that the state would contribute whatever is required to keep up with increases in commitments to workers. The law now caps annual increases, a move state Sen. Laura Kelly, a Topeka Democrat, and study commission member, said results in ongoing underfunding of KPERS and therefore "makes no sense."
Of course, the cap does make sense in the context of the entire state budget. If there were no cap, the state would be forced to allocate dollars to teachers' and government workers' pensions that could go to public schools, social services and public safety.
Still, commission members plan to discuss eliminating the cap.
Commission members also plan to consider recommending issuing bonds. Such a plan anticipates 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, only to see the long-term funding gap still jump because of investment losses during the Great Recession. Another bond issue — and the annual debt payments — would have to be much larger to make a big dent.
The commission can't avoid discussing such alternatives, and legislators can't either, because of the long-term KPERS funding gap.
"It's probably the 10,000-pound elephant sitting in the room," said state Sen. Jeff King, an Independence Republican and study commission member.