Though the $1 billion year-to-year growth in the unfunded liability of the Kansas Public Employees Retirement System is troubling, there are reasons to be optimistic about KPERS’ long-term prospects. With enough time, and a robust enough economic recovery, the recently approved legislative remedies should work.
As Alan Conroy, executive director of KPERS, recently wrote in a retiree newsletter: “With continued strong investment returns and the positive effects of last year’s benefit change legislation, KPERS is on a clear path to financial soundness. Projections show the actuarial liability will be paid off by 2033.”
Still, Conroy had a sobering report for lawmakers during last week’s special session. He said KPERS’ unfunded liability increased by $1 billion to $10.2 billion in 2012, despite 14.5 percent net return on investment during the year. Deferred losses relating to the 2008 market collapse are to blame, he told the legislators, having decreased the system’s funding to 56.4 percent of future liability compared with 59.2 percent in 2011.
That 56.4 percent is moving the wrong direction – and is a long way from the industry standard of 80 percent funding.
As a result, expect more debate at the Statehouse in 2014 about Gov. Sam Brownback’s goal of converting KPERS to a 401(k)-style defined-contribution plan.
Steve Anderson, the state’s former budget director, pushed that view to the Wichita Pachyderm Club last week, noting that official accounting changes soon will require school districts to carry unfunded pension debt on their balance sheets. “The only fix is a conversion to a defined-contribution (plan) for a least new members,” Anderson said.
To its credit, the Legislature has hardly left KPERS’ future solvency problems unattended over the past decade. Bills variously increased contribution rates and authorized bonding, and made changes affecting new hires. A study commission provided the 2012 Legislature with ideas to strengthen KPERS long term, and lawmakers acted in 2012 and 2013 to make changes enabling higher employer and employee contribution rates, providing larger state contributions from lottery revenue, and creating a type of cash-balance plan – a blend of the defined-benefit and 401(k) option – for new hires beginning in 2015. They also earmarked 80 percent of the proceeds of surplus real estate sales to go toward KPERS’ unfunded liability.
Whether the changes lead to a funded ratio of 100 percent by 2033 will depend on how the investments perform, as well as whether lawmakers continue the current funding plan. Certainly last year’s 14.5 percent net return on investment was encouraging, as are documented net returns of 14 percent so far in 2013.
Lawmakers and KPERS trustees alike will need to monitor the system’s recovery with caution, and act if necessary.
The 156,000 active employees in state, local and school governments, as well as the 84,000 retirees already receiving KPERS benefits, deserve to know the system is sound and on track to close the gap between assets and liabilities. So do taxpayers.