It makes financial sense for the state to switch to a 401(k)-type retirement plan, if it can figure out how to cover its current pension liabilities. But that remains a big “if.”
A pension study commission voted 8-5 last week to recommend that the state move new and non-vested public employees out of the Kansas Public Employees Retirement System and into a defined-contribution plan similar to a 401(k). But it is unclear how it would do that and eliminate KPERS’ unfunded liability, estimated at about $8.3 billion through 2033.
“The math doesn’t work,” said Sedgwick County Manager William Buchanan, who served on the study commission and voted against the pension switch.
If new hires were diverted into a different pension plan, there would be less money coming into KPERS to pay out promised benefits. In addition, there may be additional costs in operating two plans.
To help reduce the liability gap, the study commission recommended that the state start paying the “actuarially required contribution” rate as early as next fiscal year (the state has been underfunding KPERS for years). A KPERS reform plan approved by the Legislature last session has the state paying this rate starting in 2018.
“What we’re asking for is five years of pain for a lifetime of state budget gain,” said Sen. Jeff King, R-Independence, who co-chaired the commission and developed the plan.
But when the state is already dealing with a budget crunch, and when Gov. Sam Brownback wants to cuts taxes, it is unclear where the state would get that extra money, about $190 million a year.
The commission also recommended that the state borrow money by issuing bonds. That could be a good option, though it can be risky if, as has happened in the past, a stock-market drop causes the investment value to be less than what was borrowed.
One way the state will save money is by reducing its retirement contributions for new employees. The commission’s plan calls for the state to contribute only 1 percent the first year of employment and then increase that contribution by half a percent each year until it reaches 5 percent in the ninth year of work.
But that raises another concern: Will the pension change make it harder to attract quality employees? Though public employees aren’t paid that well (Kansas ranks near the bottom in the nation on teacher pay), they’ve had a decent pension plan. If that is no longer the case, will fewer people be willing to enter these crucial professions? Could that end up being more costly to our state’s future than the pension savings?
Still, Brownback and many lawmakers are understandably tired of KPERS being a burden on state finances and having its liabilities fluctuate with the stock market.
The state needs to “stop the bleeding,” Brownback told The Eagle editorial board last week. That’s true, but it also needs a clear plan for helping KPERS heal.
For the editorial board, Phillip Brownlee