A report released yesterday by the Center for Applied Economics at the University of Kansas School of Business reveals that unless drastic changes are made to the structure of KPERS, the Kansas Public Employees Retirement System, the system will be unable to pay out promised benefits, and the shortfall — as much as $10 billion — will fall onto taxpayers' shoulders.

The report was compiled by Barry Poulson, a professor of economics at the University of Colorado and Art Hall, executive director of the Center for Applied Economics. Poulson also serves as a senior fellow for the Center for Applied Economics. The report was the first installment of a three-part study on KPERS.

KPERS is a defined-benefit retirement plan that covers state employees as well as police and fireman retirement, and retirement for Kansas judges. There are 250,000 Kansans who are using the KPERS system. In a defined-benefit plan, benefits are determined by a formula and guaranteed by law.

Because KPERS benefits are guaranteed, regardless of the status of the economy, if KPERS is unable to pay out its benefits, a mixture of state and local governments would be responsible for paying the funds. One option for generating the revenue would be taxes. The other is to reduce spending.

“If you are going to honor these obligations, it is going to probably require large tax increases,” Hall told Kansas Liberty. Hall said he already considers KPERS to be bankrupt because if no modifications are made KPERS will eventually be unable to pay out all of its promised benefits.

The report said that though the recession has added to the decline of KPERS, the public pension fund was headed for bankruptcy before the recession because of structural problems.

One main cause for concern is the level of unfunded liability within KPERS. Unfunded liability refers to the difference between promised benefits and the benefits that will be collected. These unfunded liabilities are thought of as a debt.

The report concludes that “KPERS is bankrupt under current operating assumptions” and points out that when utilizing the market value of assets, the total unfunded actuarial liabilities have more than doubled within the last year from $4.8 billion to $10.25 billion. Based on current data, these unfunded actuarial liabilities are expected to continue to increase.

“The KPERS Board and the unions who represent public sector employees negotiated benefits for those employees that they could not afford,” the report said. “As a result, taxpayers will be paying taxes to finance these benefits long after these decision makers have left.”

The report estimates that the current unfunded liabilities are roughly equal to about 8 percent of the state’s gross domestic product.

But there are options that, if exercised, might change this outcome. One suggestion by the report is for KPERS to undertake a complete structural overhaul into a defined-contribution pension plan. Most private businesses, as well as the Kansas Board of Regents, use this type of plan.

Defined-contribution plans mandate that a portion of the worker’s salary is pooled into a retirement plan, and then these funds are invested and therefore subject to possible losses or gains depending on the market.

Although this structural change could guarantee gradual improvements into KPERS financial situation, there are less radical changes that could be implemented, though it is unclear whether smaller changes could completely mitigate the crisis, Poulson said.

“Everything should be on the table, including changes in plan structure, changes in benefits, increased employee contribution rates, and increased employer contribution rates,” the report said.

The report was prompted by the realization that government pension plans across the nation were going bankrupt, which Hall referred to as a “country-wide phenomenon.”

When considering the most recent information available for unfunded liabilities in 11 similar public pension plans, Poulson said KPERS stuck out as having one of the worst financial situations.

Unfunded liability impacts states on a per capita basis. Poulson said each Kansas citizen would owe $2,963 to pay off the debt. KPERS, he said, is at a 49 percent funding ratio, when considering the market value of assets, which is one of the lowest in the country. Funding ratios are determined by dividing assets by liabilities. Private businesses consider a ratio of less than 65 percent to be critical.

“Kansas is on life support at this point,” Poulson told Kansas Liberty. “Frankly I am not sure if they can recover from this.”

Alterations to the structure would require swift action by legislators, who are in charge of overseeing KPERS.

The majority of pension plans in the private sector are defined-contribution plans, whereas the public sector still largely uses defined-benefit retirement plans. A 401K is an example of what is commonly known as a defined-contribution plan.

After realizing the inherent structural problems of the defined-benefit plans, some public states' pension plan administrators are changing over to defined-contribution plans. Michigan and Alaska are examples of two states that have already made the transition, and Oregon has adopted a type of hybrid plan that incorporates both structures.

Poulson said the usage of defined-benefit plans in the public sector was founded on a common belief that public employees are paid less than employees in the private sector, and therefore additional benefits needed to be paid to offset the difference.

Although the usage of defined-benefit plans is almost extinct in the private sector, the public sector continues to use them even though they generally experience great difficulty, he said.

“In the public sector, taxpayers are on the hook,” Poulson said. “There is this expectation that taxpayers will continue to bail out these plans even when they run into the kinds of problems that KPERS has.”

Kristen Basso, KPERS spokesperson, did not refute the argument that KPERS was in an unstable financial situation and said that although KPERS was not in “immediate crisis, the depth of the impact is serious.”

“Investment losses over the last year due to unprecedented financial market declines have had a substantial negative impact on KPERS' long-term funding outlook,” Basso told Kansas Liberty. “In addition, employer contributions not being at the actuarially required rate and benefit enhancements from the 1990s have had a lasting effect on funding.”

As of 2008, KPERS had $9.9 billion in assets, a decrease from the $14.2 billion in assets the plan had in 2007. Basso said that benefits are being paid out at the level they were promised.

Basso said that the KPERS board was already aware of the financial problems, which had prompted a discussion with the legislative Joint Committee on Pensions, Investments and Benefits.

“The longer we wait to fix the problem, the worse it will get,” Basso said.

KPERS has compiled reports regarding the fiscal situation. One report admits that “given the current funding structure, this means that the System does not have enough assets to provide all the benefits already earned by members.”

Resources
Center for Applied Economics full report, “The Funding Crisis in the Kansas Public Employees Retirement System”: http://www.business.ku.edu/_FileLibrary/PageFile/1391/TR%2009-0904--KPERS%20Crisis.pdf

KPERS web site: www.kpers.org

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