No easy fix for KPERS unfunded liability, lawmakers are told
Topeka ? 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.
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.”