All things KPERS are worth watching. While the complexities are enough to cause one’s eyes to cross and a migraine-level headache to commence, it is the lifeblood of 318,000 people employed by 1,500 state and local governmental employers in Kansas. The fund is worth nearly $21 billion.
There has been considerable discussion about refinancing the plan. The governor has called for a reamortization that would allow the state to defer paying about $963 million over the next five years. The Kansas Public Employees Retirement System Board of Trustees estimates that “savings” will cost taxpayers $4.4 billion long term; akin to refinancing a five-year car loan with a 20-year second mortgage. Yes, monthly payments fall, but total cost bloats and is pushed to future generations.
It seems great when the credit card or mortgage company offers the ability to skip a payment until the realization hits that it still has to be paid with a higher cost.
We are not a fan of the plan.
There is much hand-wringing when one hears talk of unfunded liability. Make no mistake. We believe KPERS is on solid footing. A new college graduate beginning a career as a teacher can expect the plan to be there upon retirement. The plan is also getting stronger, and it has a taxpayer guarantee.
While every pension plan desires to be 100% funded, it is rare that this happens. The KPERS’ legacy State/School fund currently is 66% and improving. The board believes it will achieve the 80% threshold that industry experts recommend by 2029. Those same experts say funding below 60% requires prompt attention. KPERS is in the cautionary range now.
We think everyone breathes easier when his or her pension fund is rated “good,” and we’d like to see KPERS get there sooner than later. Fully funded could happen as early as 2033. Refinancing the plan takes an additional seven years to hit the “good” mark and an additional 10 to hit 100%.
We all know the stock market goes up and down like a balloon on a windy day. Being above 80% makes those changes a little smoother.
There is another reason why we against a refinance, and that is the usage of aggressive assumptions.
KPERS uses a rate of return assumption, 7.75%, that is higher than what its consultant recommends. Only a dozen of 129 peer funds use an assumption higher than 7.5%.
That rate is used to estimate future investment earnings and estimate the size of the future obligations that need to be paid to retirees.
If it turns out that KPERS was too optimistic, as comparisons suggest it might be, the pension deficit will balloon and Kansas taxpayers will be on the hook for much higher expenses in the future than are being assumed today. The governor’s plan would make that price tag even higher.
We believe it is important to focus on the now. Our current and future retirees deserve it.