New research from Kansas Policy Institute reinforces what some have known but many have discounted: The Kansas Public Employee Retirement System is in poor financial shape, and it’s going to cost Kansans a lot to fix it. It is urgent that we enact substantive and meaningful reforms now, rather than later. KPI writes the following in introducing its new study Preventing Bankruptcy in the Kansas Public Employees Retirement System.
It turns out that the $9.2 billion hole found in Kansas’ public pension program will balloon under new accounting standards used by governments across the country.
Under the current standards, Kansas’ pension system (KPERS) is funded at 59.2%, 80% is a generally accepted barometer of pension health. These numbers demonstrate that Kansas has one of the worst funded pension systems in the country.
Unfortunately, the new standards will only make things worse as our funding ratio will drop to 46.1 percent under the new standards.
Each person in Kansas will have to pay $3,285 to fill our KPERS hole under the old standards and things will only get worse.
The executive summary of the study follows.
Recent evidence reveals that the Kansas Public Employees Retirement System (KPERS) is one of the most underfunded pension plans in the country (59 percent funding ratio at the end of 2011) and that there is a high probability the plan will not have sufficient funds to meet pension obligations over the next decade. This funding ratio will deteriorate further under the new accounting standards discussed below. The solution to this funding crises is to bring pension benefits into line with the costs of pension plans for individual employees. A number of states have successfully enacted structural reforms in their state pension plans to accomplish this objective, including defined contribution and hybrid plans.
Unfortunately the recent reforms enacted in KPERS creating a cash balance plan for new employees fails to accomplish that objective. This study provides a roadmap for pension reform in Kansas, the major conclusions of the study are:
1. Use the New GASB Accounting Standard
The new GASB standards to be implemented in 2013 and 2014 will require realistic actuarial assumptions and reporting. It is time for Kansas and other states too incorporate this more realistic data in transparent and timely reporting and to use this data in policy formulation.
2. Enact Structural Reforms
Using more realistic actuarial assumptions, via new GASB standards, most states, including Kansas, will find that they face a funding crises in their state and local pension plans. Kansas legislators must follow the lead of state and local governments that have successfully replaced these defined benefit pension plans with defined contribution or hybrid plans.
3. Bring Public Sector Pension Benefits In Line with Private Pension Benefits
Public sector workers receive wages and salaries equal to or greater than comparable employees in the private sector. The pension and other post employment benefits received by public sector workers are significantly above that received by private sector workers. The outcome of recent pension reforms is to bring convergence of pension benefits in the public and private sector.
4. Legal Challenges to Public Sector Pension Reform
Structural reforms enacted to solve the funding crises in state and local pension plans have been and will continue to be subject to legal challenges, and Kansas is well positioned to meet these legal challenges.
5. Bankruptcy, Not Bailouts
In Kansas there will be tremendous pressure to bailout failed state and local pension systems to avoid bankruptcy. Bailouts of pension plans create all the wrong incentives. If state and local governments cannot manage their pension plans and other financial affairs bankruptcy forces them to address these issues.
6. Launch an Education Campaign
Successful pension reform in other states such as Utah and Rhode Island has required a bi-partisan effort in the legislature and support from all the stakeholders. Generating this support for pension reform in Kansas will require an education campaign. Kansas citizens must understand that the current defined benefit pension plan is not sustainable. Solving the funding crisis in KPERS will require burden sharing by all the stakeholders, including current employees, retirees and new employees.
The full study is at Preventing Bankruptcy in the Kansas Public Employees Retirement System.