By Gene Meyer | Kansas Reporter
TOPEKA — The Kansas state pension fund is broken and, so far, there is no clear plan for fixing it.
By conservative estimates, an $8.3 billion gap exists between the money the Kansas Public Employees Retirement System will need to pay retirement benefits promised to teachers and government workers through 2033, and the money it will probably have by then to make those payments.
"The unfunded liability is like an elephant that won't go away," KPERS chairman Ron Hagen said.
Some say the shortfall could be much more, and taxpayers — who are obligated by state law to pick up the tab for promised benefits that investment profits fail to cover — would be left with the bill, the size of which also remains unclear.
Pension watchers — making assumptions about how fast investments will grow — say the gap is nearly three times larger than the $8.3 projection.
"That value fluctuates," Alan Conroy said. "I'm confident that KPERS' actuaries are following currently accepted guidelines in their projections."
This week, Conroy, director of the Kansas Legislative Research Department, was chosen over 25 other candidates to lead the Kansas Public Employees Retirement System as executive director. He'll earn $175,000 a year. The previous director, Glenn Deck, retired in September.
Conroy, 56, will supervise a staff of 85 workers who administer about $1.3 billion annually in retirement benefits to KPERS members.
Conroy said Tuesday he has no immediate plans to make major changes in the pension fund's approach for dealing with the funding shortfall, and he declined to talk in detail about potential changes to KPERS until he starts work Feb. 13.
Conroy has no investment background. "But that's a good thing," Hagen said. "We hire other people with investment backgrounds. He has a management background. His job is really about managing the resources."
Conroy now works as director of the Kansas Legislative Research Department, a nonpartisan research and fiscal agency that, among other things, calculates the official budget and revenue numbers that legislators use to allocate more than $14 billion in spending each year.
Retiree Ernie Claudel will be watching.
"He's always shown a great deal of interest in KPERS, which we think is a good thing," said Claudel, a retired Olathe school administrator who often visits the Capitol to watch pension fund deliberations and blogs to other retirees.
"But it is way too soon to know what difference he will make."
Hagen and other observers predict the pension liabilities will increase faster if legislators this session begin converting KPERS from a traditional pension plan for current employees to a 401(k)-style retirement savings plan for future hires. The move would slow the rate of contributions to the traditional plan, but it would not slow the rate at which more than 160,000 teachers and workers now on public payrolls will continue to earn benefits.
With $13 billion in assets, KPERS is the largest pension plan in Kansas. It tends to the retirement funds of teachers and other public employees of state government, as well the funds for workers in more than 1,500 state, local and municipal governments and school districts.
Other analysts contend that KPERS — like many public pensions in the nation that also presume their portfolios will grow an average 8 percent annually — is making unrealistic assumptions about future market profits and how quickly they can rebound from profound market losses in 2008 and 2009.
American Enterprise Institute, a Washington, D.C., think thank, said the actual shortfall will be nearer $21.8 billion when adjusted to real market values, rather than the multiple averages that pensions use to adjust for volatility.
In a separate study for the National Bureau of Economic Research, economists Robert Novy-Marx and Joshua Raugh estimated the gap will hit $22 million. NBER is a private, nonpartisan research group in Cambridge, Mass. That shortfall, Novy-Marx and Raugh calculate, would require every household in Kansas to pay as much as $1,197 in additional taxes annually for 30 years to cover.
"Even if you believe in 8 percent investment returns, that $8.3 billion unfunded liability now will increase to a minimum $9.5 billion in another year," said Richard Stumpf, a certified financial planner in Wichita who also served on a KPERS Study Commission.
"But even though KPERS investment managers are doing commendable jobs and achieving higher than average market returns, KPERS hasn't had an average 8 percent return in 13 or 14 years," Stumpf said.
If investment profits are as low as 4 percent or 5 percent, then that's $20 billion to $22 billion more that taxpayers will have to put into the system "is probably a minimum," Stumpf said.
By KPERS' calculations, its investments earned 13 percent in 2010, the latest calendar year for which numbers are available. But those earnings are calculated following current Governmental Accounting Standards Board rules. GASB, the professional accounting standards board for government accounting, is proposing a change in those rules to require counting losses more immediately, the way the American Enterprise Institute and Novy-Marx and Raugh did.
It is unclear whether those proposed new standards would prompt KPERS trustees to lower the funds' planned investment returns below the current 8 percent, which also would cause unfunded liabilities to grow. The trustees last summer debated cutting the rate to 7.5 percent, but ultimately voted not to change.
Conroy said Tuesday he didn't think such a reduction would happen in the short term.
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