Kansas Public Employee Retirement System (KPERS)

Topeka ? The state’s pension fund earned almost nothing from its investments last year, but its overall health improved anyway thanks to an infusion of $1 billion in cash that the state borrowed to help shore up the fund.

Officials from the Kansas Public Employees Retirement System told a legislative committee Monday that the fund earned just 0.2 percent during calendar year 2015, far below the 8 percent benchmark, which KPERS assumes as its long-term historical average.

KPERS executive director Alan Conroy noted that 2015 was not a good year for anybody invested in the stock and real estate markets.

“And of course there’s been some rebound in the last six or seven months, but we were not at the 8 percent (benchmark) for sure,” Conroy said.

Those earnings are important because for the last 20 years KPERS has been struggling to close a massive “unfunded liability.” That’s the difference between the size of the fund now, plus additional contributions and earnings it expects to receive and the long-term obligations that fund managers know they will have to pay out.

As of Dec. 31, 2015, the KPERS report said, the fund was valued at $17.4 billion. But its long-term liabilities added up to $25.9 billion, which translates to a 67.1 percent funding ratio. Most analysts say a pension fund needs to be at least 85 percent funded to be considered healthy.

KPERS manages retirement benefits for nearly 300,000 active, inactive and retired public employees in Kansas. Those include employees of the state, other than university employees who are in a different pension system, as well as employees of local governments and public school districts.

Police and firefighters, as well as state judges, are also part of KPERS, although they are in different plans that are governed by different rules.

Their pensions are funded through a combination of contributions from both employees and employers, as well as earnings received by the investment fund.

The 2015 numbers for KPERS actually reflected a healthier position than the fund reported at the end of 2014, when it was only 62.3 percent funded. The biggest reason for the improved condition, Conroy said, was the infusion of cash from the proceeds of a $1 billion bond issue, money the state borrowed specifically to shore up the fund.

Last year, lawmakers authorized borrowing the $1 billion through what are called “pension obligation bonds.” Proceeds of that bond sale were deposited directly into the KPERS fund, which immediately lowered the system’s unfunded liability.

Paying back those bonds, however, is an ongoing obligation of the state, and the payments, estimated at $65 million, have to be paid out of the state general fund.

Conroy noted that the state is paying roughly 4.7 percent annual interest on those bonds, and that’s another reason why many people are watching the investment returns closely. Many lawmakers hoped that KPERS would earn more money on its investment of that money than the state would pay out in interest costs on the bonds.

Although the actual rate of return that the pension fund earns is unrelated to the state’s ability to repay the bonds, any rate of return lower than 4.7 percent means the bonds are costing the state more than they are earning.

Because of the low rate of return during 2015, the bond issue accounted for virtually all of the growth in the fund’s asset value during the year.

Every year since 2012, the total number of active employees participating in the system has declined while the number of retirees drawing benefits out of the system has increased.

In addition, average salaries of those still in the system have been relatively flat for the last 10 years, rising only about 1.6 percent each year. But average benefits being paid out to retirees have been growing about 2.4 percent a year.

In 2012, lawmakers passed a major overhaul of the system, requiring the state to increase its contribution rate and offering employees at that time the option of contributing more in exchange for enhanced benefits. New employees hired after the law took effect enrolled in a slightly different kind of pension system that provides lower benefits than the previous system.

Earlier this year, however, the state was unable to make one of its quarterly payments of about $97 million into the fund. Instead, language in this year’s budget bill says that payment will be made up later this fiscal year, with 8 percent interest added on.

But Conroy said that delayed payment is not reflected in the most recent estimate of the unfunded liability because those estimates are based on the assumption that the state will pay that money back, with interest.