The financial future of Kansas is grim, with a deficit that may be as high as $1 billion within the next two years. If that weren't bad enough, the Kansas Public Employees Retirement System portfolio is feeling the effects of Wall Street's anguish, with a loss of almost 30 percent between January and October of last year.

Now for the bad news. According to the new president of the Flint Hills Center for Public Policy, Dave Trabert, the situation's been made much worse by a lack of legislative funding. Between 1998 and 2007, the Kansas Legislature has only allocated KPERS an average of 71 percent of the actuarially required contributions. 

This lack of legislative funding may have increased the unfunded actuarial accrued liability, or the gap between the value of assets KPERS has and the estimated liability for benefits already earned by members, to nearly $10 billion, according to Trabert.

Trabert, the former general manager of KAKE-TV in Wichita, has a background in accounting and an expertise in analyzing public government expenditures and financial statements. He also has many years of experience with investigative work into government expenditures.

“The KPERS report indicates legislators have deliberately set the formulas below that level for over 10 years,” Trabert told Kansas Liberty. “And this is an issue that’s never going to go away as long as they keep underfunding it.” 

According to KPERS spokesperson Kristen Basso, the unfunded actuarial accrued liability is determined when the KPERS Board of Trustees hires a consulting actuary. The actuary then does a valuation based on a snapshot of the gap between liabilities and assets on a specific day of the year. For KPERS that day was Dec. 31.

The actuary calculated the costs based on an "experience study" and determined how much funding is needed to be contributed to KPERS to support the earned benefits. This figure, which has not yet been released, will then be presented to the Legislature as a recommended amount of funding for KPERS. 

KPERS' recent announcement that assets had declined to $10.1 billion, from the $13.4 billion reported as of Dec. 31, 2007, means the fund had lost at least $3.3 billion reported as of Dec 31. A conservative estimate of a 5 percent increase in liabilities - an increase less than the two previous years - added to that $3.3 billion loss in assets means the gap between the current assets and the estimated liability is likely be at about $9.83 billion. That's a 77 percent increase in the unfunded actuarial accrued liability gap in one year alone and a 248 percent increase over the last six years, according to Trabert's estimates.

If Trabert's estimates hold, each Kansan’s share of the unfunded actuarial accrued liability gap will be roughly $3,544, he said, based on the size of the gap and the population of the state.

Kristen Basso, spokesperson for KPERS, agreed that the lack of funding from the Legislature has increased KPERS’ financial difficulties. 

“Not having contributions at the required rate has definitely lessened our financial status, and we are not as strong as we could be if those full contributions were being made,” Basso told Kansas Liberty.  

Rep. Robert Olson, an Olathe Republican and the new vice-chair of the Joint Committee on Pensions, Investments and Benefits - the committee that helps determine state funding for KPERS - said that the amount of funding the Legislature can provide is limited by a statutory cap which dictates how much of an increase in funding they can provide to KPERS on a year-by-year basis.  

The caps were created as a result of the Kansas Public Employees Retirement Study Commission’s recommendations to the Legislature.  The commission’s reports also led to the Legislature passing a benefit enhancement package in 1993 which established a 40-year payment plan to pay for it. 

“These enhancements and the associated funding provisions were pivotal because it was the first time that the system delayed using the full actuarial contribution rate to finance benefit enhancements, and instead set up a gradual payment schedule with statutory limits on increases in employer contribution rates,” Basso said.

“Incremental increases in employer contributions were approved to help fund the benefit enhancements," she said. "Statutory rate caps were used to help mitigate budget impact. These statutory increases were designed so that the statutory employer contribution rates would eventually meet with the actuarial rates required to fund benefits. In the meantime, it created an unfunded actuarial liability.” 

Basso said that before 2006 the statutory rate cap was at .2 percent, the amount at which contributions could increase until they met the actuarially required rate. The Legislature then gradually increased the cap until it reached .6 percent for fiscal year 2008, where it is set to remain until the actual rate meets the actuarial rate.   

Basso said that it became clear earlier this decade that the allotted amount of money wasn’t going to be enough. 

“We were on an uneven keel, and statutory limitations kept us from reaching the actuarially required rate,” Basso said. “It doesn’t make for really solid funding. This creates a situation similar to making partial payments on a home mortgage. With only a partial payment, the unpaid amount gets added to the mortgage.” 

Basso said KPERS generally pays out roughly $1 billion per year, so if KPERS somehow managed to not gain any additional assets it would still be able to provide benefits to its members for about 10 years. However, Basso said important steps were already being implemented to ensure future stability for KPERS. 

“We have had a long-term funding plan put together by the Legislature, the governor and the KPERS Board of Trustees,” Basso said. 

One aspect of the plan to help KPERS recover includes raising the employee contribution from 4 percent to 6 percent, while maintaining similar benefits. The change will take place July 1, and Basso said it is a step that will help KPERS financially recover. 

“Its important to note that the Legislature is the body that defines the plan, and our job is just to make sure KPERS stays healthy, and that we pay out the benefits,” Basso said.  

According to a KPERS report, the state of Kansas allocated $252 million for the KPERS state and school employer contributions for fiscal year 2008.  

Olson said that the mandated education funding increases have also affected the gap between recommended funding and funding actually allocated by the Legislature. 

“I think some of the school finance packages have taken us off our increases,” Olson told Kansas Liberty. “When we increased the funding that bumped up teachers' salaries, that was not projected in.” 

Olson said he hoped to increase legislative funding to KPERS, but said he wasn’t sure if that were possible this year. 

“We started increasing the state’s portion, but it can only go up a percentage amount to correct the funding liability,” he said. “I do know that KPERS is stable and that it can meet all its obligations, but we do have some problems and hopefully we will address some structural issues and try to get the funding back. I’m going to do the best I can as the new chair with my sole interest being the retirees and giving them the best pension we can and providing them with stability.” 

Rep. Richard Carlson, R-St Marys, and former vice-chair of the Joint Committee on Pensions, Investments and Benefits, also agreed that additional contributions needed to be made to KPERS.  

“Several years ago we increased the contributions to try and bring that into equilibrium and then Sept. 11 happened and put us way back,” Carlson told Kansas Liberty. “And now we are hit with the sub-prime market scandal and just don’t know quite what to do. We did have a meeting last month, and it looks like we are going to recommend to increase contributions even more so by no later than 2012 as hopefully by 2012 we will be in a much more stable situation.” 

- Holly Smith

Resources 

•  KPERS 2007 Annual Report: http://www.kpers.org/annualreport2007.pdf 

The Week in Review