Kansas Gov. Laura Kelly’s plan to refinance the state’s employee pension system encountered furious opposition on Friday from its leaders, who condemned the proposal as irresponsible.
Kelly’s office defended the plan as necessary to keep future state contributions to the Kansas Public Employees Retirement System (KPERS) affordable.
Her proposal essentially extends the time the state will take to pay off the system’s unfunded liability—the amount of money required to cover all future retirement costs. Kelly said the process, called reamortization, is needed to help prepare state government for a recession and keep contributions “manageable over the long run.”
It also would also make $145 million a year available to pay for new spending proposed this week by Kelly, which includes additional child welfare caseworkers and corrections officers, education, Medicaid expansion and a raise for state employees.
The state would pay less now and more later. The plan would save the state $770 million over the next five years, according to calculations by KPERS. But over 30 years, Kansas would ultimately have to contribute $7.4 billion more than currently projected.
“This looks to me like a terrible idea,” said Ernie Claudel, a member of the KPERS Board of Trustees. The board voted unanimously Friday to send a letter to Kelly and lawmakers expressing their disapproval.
A Kelly spokeswoman defended the proposal.
“This is not about short-term budget fixes, it’s about long-term fiscal stability. Re-amortization will make $145 million available in the next fiscal year, but more importantly it will make the state’s payment schedule more sustainable next year and into the future,” spokeswoman Ashley All said. “Without it, the state will see its required payments balloon in the coming years which could be devastating.”
But KPERS sees a plan that could make the pension system more vulnerable to an economic downturn, a contention disputed by Kelly.
Under current law, only the KPERS board—chaired by Kelly Arnold, who is also the chairman of the Kansas Republican Party —can make the financial changes that Kelly wants, but the Legislature could change the law to mandate the refinancing.
The changes Kelly is proposing could affect state finances for decades to come.
In the short term, refinancing will shave $145 million a year off the state budget. That helps the state maintain a positive ending balance while providing money to fund education, foster care and other priorities.
But in the long-term, Kansas will end up contributing much more to its pension system, KPERS projections show. Under current law, annual state contributions to the pension system are expected to rise until they hit a peak of $900 million in 2035, but then fall to less than $100 million per year in the decades after. Currently, the state contributes less than $600 million a year.
Kelly’s plan would keep state contributions under $600 million a year through 2031. By 2049, annual contributions would approach nearly $1 billion, according to KPERS.
The system currently has an unfunded liability of more than $6 billion that is expected to start shrinking sometime around 2022. KPERS projects that Kelly’s plan would keep the unfunded liability above $6 billion until 2036.
“It’s not that hard to imagine where we slip into another recession at some point, when things get tighter at some point, and more decisions are made to delay payments,” said Jake LaTurner, the state treasurer and a Republican candidate for U.S. Senate.
LaTurner, who sits on the KPERS board, said it would be “unwise to go down this path.”
Kelly’s administration emphasized that her plan would not affect retirees.
“There are no cuts or negative impact to services” for retirees, Kelly’s budget director, Larry Campbell, said Thursday.
The state’s pension system has been a source of controversy for years. Lawmakers and then-Gov. Sam Brownback passed legislation to overhaul the pension system in 2012, which put KPERS on better financial footing.
Kelley’s measure is not the first that seeks to use the pension system as a tool to help balance the budget. Brownback’s 2017 budget proposal would have increased KPERS costs by $6.5 billion over time. In 2016 and 2017, lawmakers and Brownback ultimately approved reductions or delays to contributions to KPERS valued at more than $355 million.
“Because of decisions made in recent years to use the KPERS fund to help pay for the Brownback tax plan, the state skipped or reduced KPERS payments. This has resulted in the state’s employer contribution obligations to skyrocket next year to $681 million – an increase of over $100 million. This is absolutely not sustainable for our agencies,” All said.
All also said that many states reamortize their pension systems and called it “sound fiscal policy.”
Kelly’s KPERS proposal is encountering significant pushback among Senate Republicans. Sen. Carolyn McGinn, a Sedgwick Republican who chairs the Senate’s budget committee, signed onto a statement with Senate President Susan Wagle and other GOP leaders criticizing the plan.
“We need to now focus our efforts on passing a fiscally sound budget that pays off debts, invests in education, and protects our children and grandchildren’s prosperity,” the joint statement said.
Sen. Tom Hawk, the ranking Democrat on the Senate’s budget committee, said he has some confidence in Kelly’s proposal, given her experience working on budgets during her time as a state senator.
“I’m wondering if all the pushback is … from people who said, ‘Well, we figured this out and we were the heroes and now the governor has another plan and, boy, we don’t want to give up,’” Hawk said. “I think you have to be careful saying there’s only way to solve a problem.”
Lawmakers may take months to decide whether or not to adopt Kelly’s proposal. Final action on the budget may not come until April or later because lawmakers will be waiting for new revenue projections.