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Opinion

Opinion

Legislature to blame for KPERS mess

March 21, 2012

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After months of debate, the Kansas House has passed legislation that would radically change the public employee pension system for new employees. (I should mention that university faculty are not part of KPERS.)  This change will do away with the defined-benefit system that is now the central feature of KPERS and replace it with a defined-contribution plan. It seems quite likely that the House plan will be modified when it reaches the Senate, so the exact end result remains up in the air, but there does seem to be strong support in both houses for some change.

Not surprisingly, public sector unions and interest groups oppose the change from the current KPERS system, pointing out that the proposed system will significantly reduce the value of pensions for newly hired public employees. Those who support the change argue that the state cannot afford to continue the old defined-benefit plan because it is too expensive and point out that many states and much of private industry has already abandoned defined-benefit plans and moved to some form of less expensive defined-contribution plan.

While there are reasonable arguments on both sides of this issue, there are a few issues that simply cannot be ignored. The first of these is quite simple and serious: Over the years, successive legislatures have failed to adequately fund the KPERS system. These years of underfunding have created a massive deficit in the system, a deficit the changeover itself will not solve, although the House bill proposes to use future gaming revenues to lessen the deficit. From my perspective, the Kansas Legislature’s failure to fund a major state financial obligation is no less than a case of dereliction of duty that everyone should condemn.

I see little point in blaming employees by saying that the KPERS system was too expensive. It was not employees who set up the system. Like all other employees, public and private, Kansas public employees assumed that if the state was offering the KPERS pensions, it would live up to its obligation.

In my experience, when people accept jobs, they try to get the best compensation package they can. I also don’t believe that very many public employees in Kansas have so much bargaining power that they can force the state to pay them excessive compensation. The state set up the current KPERS system and then didn’t fund it. The blame for this massive underfunding lies with the Legislature, not public employees.

Although I would lay the blame for problems with KPERS at the Legislature’s doorstep, I find it difficult to blame the current Legislature for now deciding that it cannot offer new employees benefits the state is unwilling to pay for. Unless there is some reasonable possibility that the Kansas Legislature will completely change its nature and begin to fund public pensions fully under the current set-up, the Legislature must change the system to a form it can and will pay for. That is the financially prudent and responsible way to act.

But there is a trade-off here. The KPERS system was, many folks tell me, a significant consideration in their taking a public sector job. For many employees, the generous pension benefits provided under the current KPERS structure were a major reason for taking a job with the state. If we now significantly reduce these benefits to future employees, we may well face the possibility that the state will not be able to attract the quality of employees it wants to hire. If the proposed changes become law, the next few years of state employee hiring should tell us whether that is the case.

My bottom line on the KPERS issue is that I just don’t see very much likelihood that future legislatures will be any more willing to meet the costs of the current system than past legislatures have been. If that’s the case, it’s better, in my opinion, to change to a less expensive system, albeit one that offers reduced benefits to employees, than continue to underfund the system and gamble that somehow the state will be able to pay the pension benefits it will owe. But it is also clear to me that it is wrong to blame public employees for the state’s present financial problems because of underfunding KPERS.  That was the Legislature’s doing and the Legislature should accept responsibility for it.

— Mike Hoeflich, a distinguished professor in the Kansas University School of Law, writes a regular column for the Journal-World.

Comments

progressive_thinker 2 years, 9 months ago

State employees are clearly not to blame for this mess. Each state employee who is currently enrolled in KPERS has 4% of their gross salary withheld each and every paycheck. The employee has no choice in the matter. The employee also has no choice in how their money is invested. The employee has no option but to fully comply with the law regarding the employees' obligation regarding their retirement plan.

On the other hand, the employer, in this case the state legislature, did not comply with their obligation to fund the plan. The legislature failed to pay into the plan at either the statutory rate or the actuarial rate necessary to fund the obligation.

The problem with the proposed change that Hoeflich fails to mention is that between now and 2035, the proposed change would cost 1.3 billion more than what is currently in place. If you carry that out to 2060, the cost to the taxpayers is increased by over 13 billion over what the current unfunded liability is. [Source: kansas public employees retirement system (kpers) study commission, Legislative Research Department, Final Report, December 2011]

What the proposal does is raise the cost to the taxpayer and at the same time reduces benefits to employees.

The proposed change is at best a "lose lose" proposition, and at worst is a mean spirited and high priced assault on public employee benefits.

hoeflich 2 years, 9 months ago

Just to be clear I am not endorsing the current House proposal. At this point it is unclear what the Legislature will finally enact so I cannot tell whether it will be less expensive than the current system. My point about this is simply that the Legislature should enact a system it can and will support and that it will fund adequately. What the precise form that system should take I leave to folks better qualified than I am.

progressive_thinker 2 years, 9 months ago

Mr. Hoeflich: Thank you for that clarification. When I read paragraph 6 of your column, it did appear that you were supporting the change reflected in the bill that recently passed the Kansas House. If I misinterpreted your intent, then I apologize.

I continue to be frustrated that the "Total Cost of Ownership" of this bill keeps getting lost.

nativeson 2 years, 9 months ago

KPERS and many other public pension systems have been underfunded for decades. Successive legislatures across the country have kicked the can down the road for someone address. I certainly do not believe the public sector employees are to blame. The unions are simply advocating for their members, and they are asking appropriately for the governing body to fund the liability.

It is also the responsibility of the governing body to decide how to fulfill their previous financial obligations and set a course for fiscal responsibility. The issue with defined benefit contribution plans have proven to be two-fold. The obvious issue is the disconnect between accured benefits and market return. No governing body anticipated the massive loss of personal capital from the mid-2000s until today. Although the benefits earned have been unfunded, public sector employees in these plans have been held harmless to date with few exceptions. So, the contract has been and will be honored, and the benefit well exceeds most working people over the last decade.

The second issue with defined benefit plans relates to an aging population. Like social security, defined benefit plans did not anticipate an increase in life expectancy and the dispropotionate percentage of the population that will be in retirement in comparison to those remaining in the work force. It is an unsustainable model.

These two factors combined are forcing legislatures to think about a new model. It will mean that the contract with employees under a certain age will be modified, and that is unfortunate. However, the choice between funding an unsustainable model at an ever-increasing rate and funding other services must be made.

hoeflich 2 years, 9 months ago

I share your frustration. It seems that in recent decades neither state legislatures nor Congress make decisions based on accurate financial and economic data. Perhaps, since legislators also seem disinclined to read the legislation that they vote on, they believe that factual data is no longer needed. It is not a good situation for the state or nation.

usnsnp 2 years, 9 months ago

There is the problem. Legislators, Governors or Presidents are not ever affected by the decisions that they make. They make wrong decisions and all that happens to them is that they get voted out of office. Then they go to work as lobiest, sit on company boards or live off their gains while in office. In other words no skin in the game.

tomatogrower 2 years, 9 months ago

i understand in the new system the state will match up to a certain amount of what the employee contributes? They didn't do that with KPERS, what makes you think they'll honor this scam?

streetman 2 years, 9 months ago

Not reading/understanding what they're voting on is part of the problem -- and it happens regularly with these entitlement issues -- witness the Obamacare bill, which didn't even ALLOW time to be read, if anyone was even so inclined. Another problem is simply not having the fortitude to say "NO" when it comes to promising excessive taxpayer funds to future beneficiaries so as to avoid an immediate hard, emotion-based discussion. Wish there was a good answer for the problem.

sciencegeek 2 years, 9 months ago

Clarification: it has not always been the case that the Legislature couldn't afford to fund KPERS. The money was available; they just chose to spend it elsewhere. Like special tax breaks for cronies' businesses. Like the income tax reductions currently being debated. Like the money pit that is the Capitol renovation.

KPERS is the only reason left to work for the state, and it's being cut. As to hiring qualified people, it is still possible, but only those who want to get some experience and leave in a few years. Once again, the Legislature has taken care of their own short-sighted interests, and the future of the state as a whole can go down the drain. A plague on them all.

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