With a big assist from Wall Street, a decisive reform begun two years ago by state legislators and Gov. Sam Brownback is on track to improve the funding stability of the Kansas Public Employees Retirement System long term.
A new report by the libertarian Competitive Enterprise Institute, “The High Cost of Big Labor: Understanding Public Pension Debt,” ranks Kansas 23rd among states for the underfunding of its pension system, naming New Mexico the worst and Illinois the second worst. The report looked at six national studies of pension systems from different time periods, finding that Kansas was in the better-funded half of states from 1990 until 2009 or so.
“It had been in the middle of the pack. It slipped down,” Aloysius Hogan, a senior fellow at CEI, told the Topeka Capital-Journal. “A lot of people are in this situation, and Kansas at least has made some steps in the right direction and others have not, so kudos to Kansas.”
State lawmakers and the governor came to an agreement in 2012 on changes to boost employer and employee contributions, tap gambling revenue, and create a type of cash-balance plan – a blend of the defined-benefit and 401(k) option – for new hires as of 2015.
The legislation wasn’t the full switch to a defined-contribution plan that Brownback and some other state leaders had sought, and would still prefer. But the reforms laudably kept the focus on closing the gap between assets and liabilities, which is where it needs to be to cover existing obligations and maintain the trust of current state workers and retirees.
The larger contributions and robust stock market – including the 14.7 and 17.7 percent investment returns for 2012 and 2013, respectively – have been the main factors in improving the funding ratio from 56.4 percent in 2012 to what Alan Conroy, executive director of KPERS, hopes a new assessment due Friday will show as nearly 60 percent for 2013.
According to Hogan, 60 percent is viewed as the floor for a pension system’s solvency, with 80 percent and more considered to be a well-funded system. So Kansas has stopped its slide and is moving toward getting its unfunded actuarial liability under control.
Though CEI views Kansas’ investment return projections of 8 percent as overly optimistic, a charge it levels at states generally, the KPERS board views 8 percent as “realistic and achievable,” Conroy told The Eagle editorial board. And such returns, aided by the changes made by the 2012 Legislature, would enable KPERS to erase the more than $10 billion in projected unfunded actuarial liability by 2033, he said.
As CEI warns, unfunded pension obligations “remain a significant threat to the states’ fiscal health and therefore to the business climate and labor markets.” And KPERS’ long-term well-being can’t be considered a given. But so far the 2012 changes appear to be paying off. Nice work.