Governor seeks study of big changes to KPERS

? Gov. Sam Brownback’s budget director told a legislative committee Friday that the proposed cuts in contributions to the state’s pension system are only temporary and will not be part of Brownback’s budget proposal for the next two fiscal years.

“That was a short-term proposal that we announced last week that will not be carried forward,” Shawn Sullivan told the Joint Committee on Pensions, Investments and Benefits.

At the same time, though, Sullivan urged the committee to study further changes to the Kansas Public Employees Retirement System, or KPERS, such as issuing as much as $1.5 billion in pension obligation bonds to finance its unfunded liability, or even handing the system over to a private company.

Last week, Brownback announced a plan to cut the state’s contributions by $40.7 million over the next six months. The move was part of a $280 million package of “allotments” needed to balance the current fiscal year’s budget.

Most of the allotments Brownback announced need to be approved by the Legislature when it convenes in January for the start of the 2015 session.

The reduction in KPERS contributions ignited sharp criticism from public school teachers and state employees who said it violated a compromise made in 2012 when the Legislature passed sweeping changes to the pension plan. Part of that package involved employees increasing their own contribution rates in order to shore up the financially troubled pension fund.

“The volume of emails that I have received from constituents and other people who are part of the KPERS system is astronomical in opposition to what the governor has proposed to do here,” said Senate Democratic Leader Anthony Hensley, who serves on the joint committee and works as a teacher in the Topeka school district.

KPERS manages the retirement fund for slightly more than 222,000 current and retired employees of state and local governments and the state’s 286 public school districts. It currently has $16.1 billion in assets, which is only 60 percent of what is actually needed to fund all the retirement obligations the system has already accrued.

That gap between assets and obligations is called an unfunded actuarial liability, and it’s currently estimated at about $9.8 billion.

Hensley said the governor’s allotment cut in its KPERS contributions was unprecedented, but Sullivan disagreed, arguing that the Legislature has routinely underfunded the pension system for years in order to control state spending and balance the budget.

But Sullivan urged the committee to study further changes to KPERS in order to control future costs and reduce the state’s liability, including outsourcing the liability of the plan to a private company through a process called “annuitization,” which he said is a growing trend in the private sector.

“I know there have been a number of companies like GM, Verizon and others that have annuitized their system and outsourced the risk to an annuity system over the last couple of years, and many more private-sector plans are doing that,” Sullivan said. “However, I’m not sure of any public sector or state pension systems that have done that.”

Under that plan, a private company would assume the liability of paying out benefits in exchange for guaranteed monthly payments from the state.

Secretary of Administration Jim Clark said he was part of such a process when he worked as an officer at Westar Inc., the Topeka-based electric company formed in 1992 through the merger of Kansas Gas and Electric and Kansas Power and Light.

“I’m not suggesting annuitization is the right thing for the state,” Clark said. “I really think the study should be as broad as we can make it in order to take in all of the items that affect our costs.”

Committee chairman Sen. Jeff King, R-Independence, said he opposed privatizing the pension system but that he is willing to look at different proposals.

“The joint committee is open to allowing anyone with ideas on how to improve the system for the benefit of the state, and most importantly for the benefit of KPERS retirees, to bring those proposals to us,” he said.

But Sen. Laura Kelly, D-Topeka, the ranking minority member on the panel, said the Legislature looked at annuitization when a study commission developed the reform package adopted in 2012.

“I think what we came up with in 2012 was really the perfect compromise, one that works,” she said. “It works for retirees. It also works for the state and really diminishes the risk. So I don’t see any need to really even consider going towards privatization with this particular plan.”

That 2012 reform package established a new kind of retirement benefit for employees hired after Jan. 1, 2015, known as a “cash balance plan,” a kind of individual retirement account where employees are guaranteed a minimum rate of return on their investments, and their own benefits are determined by how much money is in their plan when they retire.