The Brownback administration wants the Legislature to look again at privatizing the state’s pension plan. But as with previous reviews, lawmakers likely will conclude that privatization is impractical and that the main problem with the pension plan is that the state keeps underfunding it – as Gov. Sam Brownback is doing again this year.
State budget director Shawn Sullivan and Secretary of Administration Jim Clark urged a joint legislative committee last week to study possible reforms of the Kansas Public Employees Retirement System, including having a private insurer manage KPERS, moving to a 401(k)-style plan for new workers, and issuing up to $1.5 billion in bonds to help reduce KPERS’ unfunded liability.
The insurer option would involve outsourcing KPERS’ liability to a private company through a process called annuitization. The insurer would convert the pension obligation into annuities and assume the long-term financial risk for a fee.
Some private businesses have used this process, but KPERS officials are not aware of any state pension plan that has done it. The biggest obstacle is that KPERS is currently only about 60 percent funded. Thus, it is unlikely that a private insurer would want to assume responsibility for the plan – at least not without charging a large fee.
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The 401(k) idea is proposed nearly every year. It’s appealing to many lawmakers because the state would no longer be responsible for guaranteeing a defined benefit.
If the state were starting its pension plan from scratch, it likely would adopt a defined-contribution plan. But the state legally can’t change KPERS for people already in the system, so the new plan would apply only to new hires. And one challenge of shifting new hires to a different plan is that their employee contributions to KPERS help pay benefits of current retirees. Removing those contributions could make KPERS’ financial problems even worse.
Borrowing more money could help pay for this transition and prop up KPERS. It’s also possible that the state could use the bond revenue to reduce its payments to KPERS while it is trying to dig its way out of its budget shortfall.
But borrowing comes with risk, including that the stock market could drop again, causing the state to owe more on the bonds than it earned on the investment. Also, given the state budget problems and credit downgrades, investors might be leery of purchasing these bonds and demand a higher interest rate.
The Legislature significantly reformed KPERS in 2012. Those reforms, which had strong bipartisan support, required both the state and employees to increase their contributions and created a hybrid “cash-balance plan” for employees hired after Jan. 1, 2015.
The increased payments put the state on a path to fully fund KPERS by 2033. The priority for the state should be staying on that path, not passing new reforms or going backward – as Brownback is doing by diverting nearly $41 million from KPERS to help pay for his tax cut.
For the editorial board, Phillip Brownlee