Archive for Wednesday, May 6, 2015

No easy fix for KPERS unfunded liability, lawmakers are told

May 6, 2015, 4:36 p.m. Updated May 6, 2015, 9:50 p.m.

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— Kansas lawmakers who are looking for ways to rid themselves of a $9 billion unfunded liability in the state pension system were told Wednesday that privatizing the system is probably not one of their options.

But local officials in Lawrence and Douglas County said persistent talks in the Legislature about overhauling the Kansas Public Employees Retirement System has already become unsettling to many workers.

"They do make employees nervous," said Assistant County Administrator Sarah Plinsky.

Glenn O'Brien of Prudential tells a large legislative committee hearing it would be unlikely that either his or any other insurance company could offer to insure the state's pension liability. Some Kansas lawmakers want to find a way to privatize the state pension system by shifting its liabilities to a private firm.

Glenn O'Brien of Prudential tells a large legislative committee hearing it would be unlikely that either his or any other insurance company could offer to insure the state's pension liability. Some Kansas lawmakers want to find a way to privatize the state pension system by shifting its liabilities to a private firm.

State officials began discussing the idea of privatizing the system last fall. During an interim committee meeting in December, Secretary of Administration Jim Clark urged lawmakers to consider a process called "annuitization," whereby the state would transfer the obligations of KPERS to a private company in exchange for an annual premium.

But during a joint meeting of three legislative committees Wednesday, a representative from Prudential, one of the companies that offers such services to private-sector pension plans, said that probably was not an option for Kansas, at least not now.

"We cannot take on underfunded obligations," Prudential's Glenn O'Brien said.

KPERS manages a $16 billion fund and provides retirement benefits for about 289,000 active and retired employees of the state, public schools and local governments in Kansas.

But according to the most recent estimates, that's only about 60 percent of what it should have in order to be sustainable into the future and pay out all of the benefits it will owe.

Among its active members are nearly 1,800 employees of the Lawrence school district, 526 employees at the city of Lawrence and 330 employees of Douglas County.

Those numbers do not include police and firefighters, or judges, all of whom are in different retirement plans. They also do not include Kansas University employees who are members of the separate Regents Retirement System.

"If they’re focusing on ways to address the funding, that’s positive," Plinsky said. "We would rather have this conversation than continued lack of attention and no additional funding to support it. But as for what the future holds — that part does make folks nervous."

While Prudential has taken over risk management of several private-sector pension plans, O'Brien said the company has never tried to manage a public pension system like KPERS, largely because Prudential is an insurance company that is prohibited by regulations from backing up such plans with investments in anything other than bonds.

"I think the information that we heard was probably that it's not appropriate to consider a change," said Sen. Marci Francisco, D-Lawrence, who serves on one of the committees that heard the presentations.

Francisco said she also hears concern from constituents who get nervous from the constant legislative debate over the future of KPERS.

"Because what any employee wants is some certainty about retirement," she said. "That's what KPERS has provided, and I hope what we will continue to provide. But every time the Legislature meets and might consider a change, it's very hard to understand how that might impact an individual. And it's hard for us to share that information because it's so different, depending on where you are in the plan."

KPERS is funded with contributions from both employers and employees, and the fund is managed by a state agency that is governed by an independent board. The Legislature is responsible for appropriating contributions for state and school employees. Other local governments are responsible for making their own contributions.

Since about the 1980s, however, the state has not contributed at a high enough rate to cover the actual future cost of paying out retirement benefits to state and school workers. That has created a large "unfunded liability," the difference between its current assets and expected investment earnings on one side, and the sum total of future obligations it has already incurred on the other.

By law, though, the state is obligated to pay out those benefits, regardless of whether it has enough money in the retirement fund to do so. That means ultimately, unless the state fills in that unfunded liability, at some point in the future the obligation to pay those future benefits could fall directly onto taxpayers.

In recent years, lawmakers have taken a number of steps in an effort to shore up the system. In 2012, they passed a major overhaul that called for higher contributions from both employers and employees. It also created a new, less generous, pension plan for new employees going forward.

And this year, lawmakers approved issuing $1.5 million in pension obligation bonds. The proceeds of that bond sale will be deposited into the KPERS fund, but state taxpayers will bear the cost of repaying those bonds out of the state general fund.

But Gov. Sam Brownback and many lawmakers say they want even more changes to reduce the state's ongoing costs, including handing over the management and obligations of the pension plan to a private company.

Mike Lane, of Dimensional Target Retirement Solution, said that would not solve the unfunded liability for current employees. In fact, it could make matters worse because if new employees contribute to their own fund, it would restrict the flow of money into the fund that is responsible for paying out the defined benefit payments to workers in the current system.

Lane also said the state shouldn't expect to solve the problem by hoping that a private investment firm could provide better returns.

"You can't invest your way out," he said.

Rep. Barbara Ballard, D-Lawrence, who also serves on one of the committees hearing the presentations Wednesday, said it wasn't clear to her where the discussion would lead, but she agreed that it is making many workers nervous.

"I think people are always skeptical, because people have worked on KPERS, especially state employees, knowing that they weren't making a lot of money but that their retirement would be secure," she said. "So then when they hear that it's a little shaky and may not (be secure), then I think they're just very skeptical about it."

Comments

Mike Riner 2 years, 7 months ago

The Legislature historically has stolen money from KPERS to fund other projects, in violation of law....stop doing that and it's one step to solving the problem. Like the fed stealing money from Social Security..or brownbutt stealing from KDOT... stop doing that...

Randy Leonard 2 years, 7 months ago

The party that talks the talk about values needs to walk the walk. The state has an obligation to the members of KPERS. KPERS was part of the employment agreement just like their salary. It must be funded and made secure.

James Howlette 2 years, 7 months ago

The saving grace may be that it is also part of the legislator's salaries.

Lawrence Freeman 2 years, 7 months ago

Mr. Hancock, it was 1.5 billion that was borrowed.

William Weissbeck 2 years, 7 months ago

Here is a scary thought - what if workers aren't paid enough in the first place that would permit the necessary deductions on their part to fund their part of retirement, and what if the majority of tax payers cannot be taxed enough to fund the state's portion of the pension, doesn't that lead to the conclusion that in reality most of us can never retire? Kinda of makes you think of some 3rd world country where old people if they stop being productive have to be supported by their children, or just live in utter poverty.

Marc Wilborn 2 years, 7 months ago

While different rules govern SS and KPERS, the intent is the same - make promises that may not be sustainable at some point in the future. This has been a problem for many years in Kansas and nationally with the problem just kicked down the road.

The problem at KPERS is cash flow and creating separate plans which diverts incoming contributions will only serve to strangle the remaining employees. That's why Pru doesn't want it. The stand alone unfunded liabilities of the current accrued benefits is the hole that needs to be filled. If interest rates rise significantly then this hole will fill itself partially as the value of the liabilities will shrink relative to the plan's assets but this will not be enough by itself.

I think that a historical accounting based on this comment would be very interesting.

"Since about the 1980s, however, the state has not contributed at a high enough rate to cover the actual future cost of paying out retirement benefits to state and school workers. That has created a large "unfunded liability," the difference between its current assets and expected investment earnings on one side, and the sum total of future obligations it has already incurred on the other."

How much was withheld and by whom and how much of the unfunded liability is due to historically low interest rates which is just another tax on those about to retire.

Stuart Sweeney 2 years, 7 months ago

Quit being cheap and restore taxes to the precut levels. Fund the employees of the state like we promises them while we were paying substandard wages when compared to industry. The only ones complaining of high taxes were the Kochs and the Chamber of Commerce, the exact people who demand so much more from the state.

Gerald Kerr 2 years, 7 months ago

Regardless of party legislators are driven to make promises they can't keep. When they raise taxes to meat those promises they further impair the fiscal health of their state by driving tax payers, especially small businesses out of the state, or out of business.

Dare to look at the list of states in financial trouble and compare to the states ranked for per capita tax burden. You will find that those states with the highest per capita taxes are the very states who are in greatest financial jeopardy of defaulting on their promises.

Missouri is cutting taxes from a current rate that is already substantially lower than Kansas. Raising taxes to pay for more services will drive more businesses, especially small businesses out of this state.

James Howlette 2 years, 7 months ago

Please give us links to make that comparison and justify your findings. Thanks.

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