Kansas Boosts Pension Funding Now to Save Money Later

Published May 31, 2016

Using newly passed legislation to begin plugging funding holes in the Kansas Public Employees Retirement System will cost state taxpayers an additional $14.5 million in just the first year of the reforms, system officials told legislators June 1.

Those scheduled increases in 2014, on top of about $481.4 million that taxpayers already pay to fund Kansas’ required annual contributions to teachers and state workers’ pension plans, escalate sharply after that, to a projected $94.8 million a year by 2017, Glenn Deck, KPERS chief executive, told a meeting of the legislature’s Joint Committee on Pensions, Investments and Benefits.

But escalating those payments now will save taxpayers money in the long run, Deck told the legislators. Investing more money earlier in the underfunded teachers’ and state workers’ plans is projected to cut more than $2.9 billion from the estimated $23 billion that would be required at present contribution rates to fund the plans through 2033.

Bigger Payroll Deductions
Many KPERS-covered workers, who now put nearly $216 million of their own money into the plan through payroll deductions, will be kicking more into the effort too, Deck said. Those contributions are scheduled to rise by another $32 million in 2014 and nearly $80 million in 2015.

These increases won’t hit workers hired after July 1, 2009; the new pension changes will trim their future benefits instead, through either lost cost of living adjustment guarantees or benefit calculation formulas that will result in smaller checks.

All these projections are subject to change, however. The new law, which Kansas Gov. Sam Brownback (R) signed in late May, calls for the creation of a 13-member KPERS study commission, appointed by the governor and leaders of both houses of the legislature, to come up with proposals for revamping the retirement plan entirely and to present them to legislators next January.

The projected contribution changes reflect only what seems likely to happen if the Internal Revenue Service declines to approve some changes needed to make the new plan work or if lawmakers are unable to agree on further changes that are expected to be proposed in 2012.

Choice for Workers
The plan requires teachers, state and local government workers and other plan participants in 2013 to choose between contributing larger shares of their salaries to their KPERS pensions or settling for a less generously calculated pension when they retire.

KPERS is the state’s largest pension manager, tending retirement money for about 250,000 teachers, workers and retirees. It faces what is officially projected to be a $7.7 billion gap between benefits it has promised members and the money it will have to pay those benefits between now and 2033.

No Defined Contribution
The new plan did not include a requirement many House members wanted that would have stopped offering traditional pension benefits to teachers and government workers hired in 2013 and offered them 401(k)-style retirement savings plans instead. Such a switch would limit Kansas taxpayers’ future exposure to funding shortfalls but do nothing to plug the gap that exists now.

“We’re not happy with this, but something has got to be done now,” said Kansas House Pensions Committee Chairman Mitch Holmes (R-St. John).

Holmes and other supporters say they believe there is a good chance the new commission will propose switching to a savings plan or some hybrid that combines such a plan with some of the guarantee features of traditional pensions.

Both Brownback, who will pick five members of the commission, and House Speaker Mike O’Neal (R-Hutchinson), who will pick two, have indicated they think such a switch is needed.

Optimistic Investment Projections
Kansas state Rep. Charlotte O’Hara (R-Overland Park) voted against the plan, saying she believed it would do nothing to restore KPERS’ financial health because pension fund managers are projecting fund investments on average will produce 8 percent returns annually.

KPERS returns have been less than half that in some years, which will make the actual funding shortfall far worse than it is officially portrayed, O’Hara said.

“We need to go to a DC plan to make this work,” she said.

DC is an acronym for defined contribution plan, which is the formal name of the 401(k)-style plan she and other House members prefer.

Gene Meyer ([email protected]) is editor of KansasReporter.org, an affiliate of the Franklin Center for Government & Public Integrity.