Kansas Shouldn’t Push Pension Debt Into Future So It Can Spend More Today
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Commentary

Kansas Shouldn’t Push Pension Debt Into Future So It Can Spend More Today

Gov. Kelly’s calls for adding another $4 billion in long-term debt so that the state government can spend more money right now would be fiscally irresponsible and unfairly stick future generations with the bills.

To help finance her $7.8 billion budget proposal, Gov. Laura Kelly asked the legislature to reduce the amount of money the state contributes to the Kansas Public Employees Retirement System (KPERS) over the next few years and delay making debt payments. While the House seems set on rejecting the plan, it did advance it out of committee and to the full chamber.

Kansas’ pension system for public employees has just 64 cents for every $1 worth of retirement benefits that have already been promised to workers and retirees. In personal budgeting terms, Gov. Laura Kelly’s plan would be like asking a credit card company to lower your minimum monthly payment while also significantly raising your credit limit — it would cost taxpayers and KPERS members billions in extra payments over the long-term.

Re-amortization, which is basically a refinancing of debt when the borrower is having trouble making payments, of KPERS would allow the state to make smaller pension payments in the near-term so that it can spend the money it doesn’t have to devote to pensions on other things. Unfortunately, the smaller the pension contributions that Kansas makes today, the higher the debt grows and the bigger the contributions must be tomorrow.

KPERS Executive Director Alan Conroy estimated the governor’s proposal would cost an extra $4 billion in additional contributions just to pay off current debt. To make matters worse, any outside events, like an economic downturn that lowers investment returns or requires contributions to exceed current limits, would compound the debt and push KPERS’ current funded ratio — it has 64 percent of the money needed to pay benefits — down even further.

Kelly’s proposal also jeopardizes the progress made by the 2013 reforms to KPERS. Those reforms closed off the risk-laden defined-benefit plan and opened a more sustainable cash balance plan for new and future hires. It also tied pension benefits to the pension fund’s investment performance and is designed to minimize the risk of future underfunding.

However, while the 2013 reforms importantly closed off the legacy plan off to new members, they did not lower the risk built into the legacy pension system that caused the debt in the first place, nor did they pay off that debt. Thus, to slow the growing funding gap, Kansas should consider switching from a fixed, statutorily-based contribution rate to one set by plan actuaries. Such statutorily-based funding policies intend to promote year-to-year contribution stability — the government needs to contribute a set amount each year — but when pension plan’s costs exceed the fixed rate on contributions set in a statute, the pension system’s unfunded liabilities grow — requiring increased payments in the future.

A Reason Foundation analysis found that $4 billion in KPERS’ unfunded liabilities grew from 2001-2017 due to the state’s cap on contributions. Similarly, a 2019 National Association of State Retirement Administrators study on state and local contributions showed that out of 113 government retirement plans surveyed, only 12 paid a lower percentage of their actuarially required contribution—what it takes to fund the retirement benefits that have been promised— than KPERS, which paid just 73.2 percent of what was needed.

Kansas also needs to lower its expected rate of investment returns, which is 7.75 percent. KPERS wisely dropped the rate from 8 percent in 2017, but it is one of only eight pension plans in the Public Plans Data directory that still assumes its investments will earn 7.75 percent or more a year. Since 2001, KPERS’ average market return was 7.41 percent and the return rate has been just 6.93 percent over the past decade. Each year of missed investment expectations increases debt. As a result, failing to meet Kansas’ overly optimistic investment return expectations has added over $1 billion in pension debt since 2001.

Gov. Kelly’s calls for adding another $4 billion in long-term debt so that the state government can spend more money right now would be fiscally irresponsible and unfairly stick future generations with the bills.

Ryan Frost

Ryan Frost is a policy analyst at Reason Foundation's Pension Integrity Project.

Michael Austin is director of the Sandlian Center for Entrepreneurial Government at the Kansas Policy Institute.