If the state were starting from scratch in creating a pension system, it would no doubt set up a 401(k)-type plan, like many businesses have. But that’s not the situation.
The Kansas Public Employees Retirement System already exists, and it faces a long-term funding shortfall of about $8.3 billion through 2033. If the state switched now to a defined-contribution plan, as Gov. Sam Brownback and some lawmakers want to do, how would it cover that unfunded liability?
That’s the key question that a pension study commission faces. So far, there is no clear answer.
As actuaries for KPERS reported last spring, moving to a defined-contribution plan would make it even more difficult to cover the unfunded liability. That’s because future contributions would be diverted to the new plan, yet state and local governments still would have to cover the shortfall between KPERS’ long-term revenues and promised benefits.
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One way to help cover the shortfall would be to borrow the money. There has been some talk about issuing up to $5 billion in bonds, though Brownback won’t say whether he supports that idea. That 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.
The Kansas Policy Institute, a free-market think tank, has looked into the option of the state breaking its pension promises to current and former employees. But that is unlikely to fly legally or politically.
This challenge is the main reason why a Senate study committee, headed by Senate President Steve Morris, R-Hugoton, opted last session not to switch to a defined-contribution plan. Instead, it recommended that the state deal with the shortfall mostly by increasing contributions from employees and from state and local governments, which have chronically underfunded KPERS.
This plan received bipartisan support and had the backing of employee unions. But Brownback and some House lawmakers agreed to support this reform only if a pension commission first looked again at other reforms, including switching to a 401(k)-type plan.
One alternative the committee is examining is a partial switch to a defined-contribution plan. Under this approach, the first part of a worker’s salary, possibly $50,000 or $80,000, would be covered by a traditional plan and the rest by a 401(k)-style plan.
The hybrid plan would help keep some new money coming into KPERS, though it still would be more costly than the Senate reform plan.
If the state can switch to a defined-contribution system, it could save money in the long term. But how to get from here to there remains the $8.3 billion question.
Correction: The Kansas Policy Institute has looked into the option of the state changing future pension benefits of current employees, not breaking promises on already earned benefits of current and former employees.
— For the editorial board, Phillip Brownlee