Ed Trimmer KPERS Op-Ed

At the end of the 2011 legislative session, the Kansas House and Senate were faced with a Kansas Public Employees Pension System (KPERS) that had an $8.7 billion unfunded actuarial liability (UAL).  The unfunded liability was to a degree the result of the poor economy but it was also the result of more than 17 years of underfunding by the Legislature.   During  the 2011 legislative session the Legislature passed a Senate amended version of House Bill 2194.  The bill calls for the State to pay its actuarial rate and would, as a result, eliminate the unfunded liability by the year 2035.  The legislation also calls for a KPERS Study Commission to be established and for it to meet 10 times during the fall to study other options as well.  I was appointed to that Commission in July and on Thursday, December 8th we made our final recommendations.  The purpose of this update is to report on what was recommended.

There are two main types of pension systems in the United States, the defined benefit system, which KPERS uses, and the defined contribution system that includes 401K plans.  The main difference between the two is that the defined benefit system defines what the retiree will get at the end of his/her service, while the defined contribution defines what the retiree will put into  the system but does not guarantee the final rate of compensation.  That final rate would be market based.  The defined benefit does not give the employee a choice of plans but seem to provide a better rate of overall return in the long term because of the length of investment and the size of the investment pool.  The defined contribution system gives the employee more choice, but limits the types of investments an individual can make because each employee invests individually and not as a group.  This would, quite likely lower the employee’s final retirement benefit.

From the onset, it was clear that no matter which system we decided to promote, the unfunded liability was an issue that had to be resolved.  What the commission finally decided, on an 8 to 5 vote, was to recommend a defined service base contribution plan.  Here are some of the basic details:

• Existing retirees will not be effected by the change.
  
  
• Current vested employees (5 years or more) may remain in the current defined benefit system unless they choose to move to the new system.
  
  
• Non-vested employees and new hires will enter the new system with non-vested employees being able to roll already accrued KPERS earnings into the new plan.
  
  
• The employee will be required to invest the same 6% of their income required under HB 2194.
  
  
• The state will contribute 1% for the first year of service and add .5% each year until the amount the State contributes reaches 5%.

Participants in the defined contribution plan may contract with any legal investment firm and will negotiate with that firm the form of investment and the risks involved.
The new system will provide employees with a greater freedom of choice but will also shift the risk of the investment to the individual.

I voted against the new defined contribution system for several reasons.  First, the new system would require that the State of Kansas pay about $1.6 billion more to solve the unfunded liability from now until 2035 as compared to the defined benefit system included in HB 2194.  Between 2035 and 2060 the new system would cost the State more than $13.3 billion compared to the defined benefit system included in HB 2194.  As several members of the group, who voted yes, remarked, “this is taxpayer’s money.”  I agree and we should not be spending $15 billion more of it for no real reason.  Second, the cost to the State under the defined benefit system in HB 2194 would be 1% or less in the future, while the cost to the State under the new system would continue to be between 4% and 5%.  Third, while it is true that eventually the State will never have an unfunded liability once the current one is paid, the employee will bear the brunt of government underfunding and market downturns, should those happen.  Finally, under the new system and current market conditions, many public employees would have to retire with benefits well under the federal poverty level even assuming a fixed rate of inflation.

The Governor said several times this fall that he believed the commission would be recommending a defined contribution system, all before a proposal had even been introduced into committee.  From the beginning, it was clear that the committee had been sacked with people who had something to gain financially by going to the defined contribution system.  Since five of the eight who voted yes were the Governor’s appointees, one who voted yes was appointed by Speaker O’Neal and the final two were self described Conservative Republican Legislators, it appears to me that ideology trumped reason.  We are spending far more to fund the new system and the overall benefits for the employee may well be significantly reduced.

At the beginning of the meeting one of the commissioners noted that when you are digging yourself a hole you first need to stop digging.  After 10 days of hearings, deliberation and more than $100,000 in costs, I believe all the commission accomplished was to buy a more expensive shovel.