By Gene Meyer
January 18, 2010

(KansasReporter) LAWRENCE, Kan.- Better investment results alone will not pull battered government pension plans out of the financial ditch, according to some new research by a University of Kansas economist.

Fundamental reforms will be needed in both how investment targets are calculated and how individual states determine what will be required to keep promises made to retirees, KU economist Art Hall and Barry Poulson, a University of Colorado economist say in a report, State Pension Funds Fall Off a Cliff, prepared for the American Legislative Exchange Council, in Washington, D.C.

Hall and Poulson also worked together on a September, 2009, analysis of the Kansas Public Emplyees Retirement System, that concluded longterm underfunding of the state's pension plan along with the near-meltdown of financial markets in 2008 effectively left KPERS broke.

KPERS officials and other government executives disputed that characterization and pointed out, accurately, that none of the pension checks promised to past and current teachers, and state and local government workers are in danger. But even though stock prices, as measured by the Standard & Poor's 500 Index, have risen more than 34 percent in the last 12 months, state legislators in the current session need to come up with nearly $54 million just to fund the system's increased costs in the fiscal year beginning July 1.

Hall and Poulson in their latest report compared KPERS with the equivalent Colorado Public Employees Retirement Association and retirement plans in nine other states and found in the hardest hit funds, that a combination of long-term underfunding and of measuring investment assets by actuarial standards rather than market values caused significant financial damage beyond their investment losses in 2008.

Using acturial standards rather than market values to gauge investment values isn't unusual, reports the National Association of State Retirement Administrators. It is one of many tactics that pension fund managers can use for planning purposes to help smooth out unusual short term swings in investment results. But there is a tradeoff because losses must be recognized eventually, which means aftershocks from 2008 will continue to be felt long afterward, Keith Brainerd, the association's research director, said in an October report. KPERS, with a 30-year unfunded liability of about $10 billion, or $2,962 per person, probably ranks in the bottom fourth of pension funds nationally, Hall said Monday. Of the 11 states he and Poulson surveyed, only Colorado's fund, with a $3,624 per capital funding shortfall, was in a deeper hole than Kansas'.