Just a few years ago, Kansas was on the hook for more than $10 billion in unfunded future pension payments to retirees. The health of its pension system, KPERS, was among the worst in the country.
Since then Kansas has whittled its unfunded liability to less than $7 billion and moved into the middle of the pack nationally in terms of pension health. The liability is set to drop by another $1 billion over the next decade.
Now, Gov. Laura Kelly wants to refinance the system by extending the time it will take KPERS to pay off its liability.
Pension experts compare the choice facing Kansas to refinancing a home mortgage: Are the short-term savings worth the long-term costs?
“So instead of having a mortgage that would be paid off in 15 years, she’s proposing it would be paid off 30 years from now,” said Keith Brainard, the research director at the National Association of State Retirement Administrators.
Kelly’s plan would make the state’s payments to KPERS more affordable in the short term. But it would cost Kansas a projected $7.4 billion more over 30 years.
The state’s unfunded liability wouldn’t drop to $5 billion until 2040, 15 years later than under the current plan. And it would take an additional 12 years for KPERS to be 80 percent funded, a level considered a marker of a healthy pension system.
Watching this debate are many of the 311,000 current and former public employees whose retirement plans are managed by KPERS. The system paid out $1.7 billion in retirement benefits in fiscal year 2018.
Kelly says her plan to refinance KPERS through a process called reamortization would save the state about $145 million a year over the next few years. She contends it is needed to keep state contributions to pensions manageable in the future.
“I don’t need the reamortization to pay for items in the budget this year. What we need reamortization for is the long-term stability of KPERS and the state budget,” Kelly said Thursday, adding that it’s a “good, sound fiscal tool.”
Without refinancing, the state’s current annual contribution of $547 million could rise to more than $900 million by 2035. Kelly contends that will squeeze state finances, and her administration has said contribution levels that high could prove disastrous to agencies.
But KPERS projections show — and critics are quick to point out — that Kelly’s plan will ultimately cost billions more. It’s the difference between paying roughly $21 billion or $13.5 billion over the next three decades.
“It’s not really savings, it’s deferring a payment,” said Pete Constant, CEO of the Retirement Security Initiative and a fellow at the libertarian-leaning Reason Foundation.
Republican lawmakers say the state worked hard to get back on track and can’t afford the long-term costs of refinancing.
“I probably have some pretty deep reservations about doing that,” Rep. Brenda Dietrich, a Topeka Republican, said.
Dietrich said many public employees live in her district.
“That’s one of their highest priorities — that the state pay attention to the unfunded liability and making our payments on time,” Dietrich said.
Critics of the refinancing plan say it will make the pension system more vulnerable if a recession strikes. With less money going into KPERS in the next few years, the system will have less cash if an economic downturn cuts into the system’s investments.
But Kelly says her plan puts the state in a better position to protect retiree benefits in the future by making payments to the system more sustainable. She has emphasized that current or future retiree benefits are not affected by her plan.
Senate Minority Leader Anthony Hensley, D-Topeka, said Kelly’s plan “ought to be on the table.”
“If you’re going to poke holes into this proposal, what is your alternative? That’s what I would ask the Republicans,” Hensley said.
Republican senators are pushing a bill that would increase pension funding this year. Senate Bill 9, co-sponsored by 18 GOP senators, would inject $115 million into KPERS this fiscal year in order to make up for previous contribution delays authorized by former Gov. Sam Brownback and the Republican-controlled Legislature.
The added funding would essentially come off the state’s ending balance, which is projected to be more than $900 million on June 30.
The continued debate over KPERS comes amid a years-long wave of pension reforms nationwide, driven in part by the Great Recession. Kansas made changes in 2012, including beginning a payment plan that put the state on track to pay off its liability by the mid-2030s.
“Virtually every state over the last decade has enacted some form of pension reform,” Brainard said. “And I use the term ‘reform’ broadly, also – it’s not necessarily an improvement, it’s not a worsening. It’s literally a re-forming of the plan. And we continue to see that.”
Kansas moved its funded ratio from 59 percent in 2012 to 68 percent in 2018. In short, that means KPERS has enough assets to cover 68 percent of all of its future obligations to retirees.
Still, an 80 percent funded ratio is the goal of most large public pension systems. Under current projections, Kansas will cross the 80 percent threshold around 2026, but under Kelly’s plan that won’t happen until 2037.
More than half of all states have pension plans with funded ratios below 67 percent, according to an 2018 analysis by the Washington-based Tax Foundation using 2016 data, the latest available. Five states had pensions that are less than 50 percent funded.
Kansas had the 29th best-funded pension plan among the states. At that time, Kansas had a funded ratio of 65 percent.
Kansas was behind most of its neighbors, however. Missouri had a funded ratio of 77 percent, Oklahoma sat at 72 percent and Nebraska’s was 89 percent – the fifth-best in the country. Only Colorado, at 45 percent, was worse.
Nationally, Wisconsin’s funded ratio of 99 percent earned it the top spot. New Jersey, Illinois and Kentucky comprised the bottom, with funded ratios in the mid-to-low 30s.
The idea of refinancing Kansas’s pension system was controversial from the moment Kelly proposed it on Jan. 17 as part of her budget. In the week since, the plan has become Republicans’ primary objection to her budget and the state Republican Party is circulating a petition condemning it. The board that oversees KPERS also condemned the plan.
Kelly’s budget is only a proposal, and lawmakers would have to approve refinancing for it to move forward.
Plans to change KPERS are nothing new. Over the past few years, lawmakers and Brownback approved canceling or delaying contributions valued at more than $355 million.
Like Kelly, Brownback in 2017 also proposed slowing down the state’s pension payment schedule. The plan was not approved.
Kelly said her plan is “one that many of the naysayers actually suggested a year or two ago.”
Action on the budget may not come for months. A Senate committee held a hearing last week on Senate Bill 9, however, and could advance the bill at any time.