Archive for Thursday, September 14, 2006

Underfunded school pensions challenge KPERS future

September 14, 2006

With test scores up and the school finance lawsuit recently settled, Kansas' public school teachers have launched into a new and promising school year.

Most of those teachers, however, have no idea their careers are at the center of a gathering storm in the Statehouse.

That storm has nothing to do with whether to teach evolution or sex education -- subjects that have commanded national attention on Kansas.

It has to do with retirement, pensions and fulfilling promises.

The Kansas Public Employees Retirement System needs large infusions of cash.

That need will require tough choices and heavy political lifting. And it will require today's elected officials to show some will because the political payoff for them will be almost nil, and the effects of their decisions won't be felt until most of them are long gone.

"It's going to be one of the more important issues that we try to address during the next year," said Senate President Stephen Morris, R-Hugoton.

The problem

KPERS is a quiet giant in state government that administers retirement plans for state and local public employees. It has assets of $12.2 billion, which it invests. That amount is more than state government's annual spending budget. KPERS has 250,000 active, inactive and retired members, who represent nearly 1 in 10 Kansans.

As mammoth as KPERS is, there is a gap between the value of KPERS' assets and its future obligations to provide pensions.

That gap is called the unfunded actuarial liability, and it is growing.

In 2004, the unfunded liability was $4.7 billion. A recent report showed that in 2005, the unfunded liability grew by another 10 percent to $5.1 billion.

The major part of that unfunded liability -- $3.5 billion -- is associated with the school portion of the system.

Why?

"The school system came into KPERS with no assets," said Glenn Deck, executive director of KPERS. "And the contributions have not been at the proper rate for a number of years."

When the old public school retirement plan became part of KPERS in the 1970s, it was in poor financial shape.

Deck emphasized that there is no danger of the current system not paying pension benefits, but the unfunded liability does mean that increased state funding or changes in retirement plans for future employees must be considered.

Ironically, KPERS' strong investment earnings in the 1990s masked some of the funding problems that must be dealt with now.

"We finally got a handle on the problem in 2001 and 2002, and we've been working on it ever since," Deck said.

The solution?

Compounding the problem of the unfunded liability is the always-present potential for volatile investment performance, which is exactly what happened during the recession after the Sept. 11, 2001, attacks.

Another recession would hit the pension fund hard, Morris said.

"With negative earnings in our stock market portfolio, then we could have problems. We are sort of living hand to mouth," Morris said.

Also, because retirees are living much longer now, they receive more benefits. The average female born in 2000 can expect to live 84.2 years versus 78.5 years for a female born in 1950.

Currently, employees in the system can retire with full benefits at age 55 with 30 years of service. KPERS has proposed a plan that would increase the retirement age to 65.

Under Senate Bill 281, which was introduced last year but pulled back for further study, KPERS also would offer an optional defined contribution plan like a 401(k) where employees decide how much of their pay to save. Workers then don't have to pay taxes on what they save until retirement, when they withdraw their money.

Getting there

Teachers and public employee groups are closely monitoring the situation.

Mark Desetti, director of legislative advocacy for the Kansas-National Education Assn., doesn't like the proposed solution, nor the implications.

"The argument shouldn't be 'Those teachers are going to drive us bankrupt.'" he said. "Instead it's the failure of Legislature in the past to take care of the system appropriately."

Desetti said it is a tough issue and many lawmakers now confronting it weren't around when the problem started.

"What's difficult is it is a huge amount of money, and we all know that," he said. "Ultimately it will take more than talk, but you don't solve the problem on the backs of the people who have held up their end of the bargain."

Deena Burnett, a 26-year teaching veteran who teaches eighth-grade English at West Junior High School in Lawrence, said extending the retirement age would hurt state efforts to train teachers.

"It would be one more strike against going into the field of education," Burnett said. "The reality is that the Legislature hasn't put enough money into the system. It's worrisome. It's a big question mark."

Whatever the solution, Deck said, work needs to start now.

During the past few years, he said, officials have tried to attack the problem of inadequate contributions from the state by increasing the contributions and approving $500 million in pension obligation bonds. Still, he said, the moves aren't enough to cover the gap.

For example, in the current fiscal year, the state's contribution to the state and school employee retirement groups is $209 million. But the needed amount to take care of future pensions is $319 million -- a shortfall of $110 million, and $100 million of that gap is in the school group. That shortfall of $110 million will increase to the $140 million range in the next few years, Deck said.

He equated the KPERS system to steering an oil tanker past icebergs. Adjustments must be made well in advance to navigate safely.

"There is a huge cost over time to the state for delaying funding. It's like not making your credit card or house payment," he said.

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