The newly formed Kansas Public Employees Retirement System Study Commission faces a daunting task. The most recent valuation report reveals unfunded liabilities have increased to $8.3 billion and the funding ratio fell to 62 percent, placing KPERS amongst the country’s most underfunded plans.
Still, the liability is actually much worse than reported, perhaps as high as $15 billion. KPERS assumes an 8 percent annual return on investments and acknowledges that may be optimistic. Financial experts argue government pension plans should estimate liabilities like private sector plans and use a rate that reflects the market risk inherent in those liabilities.
A recent study by finance professors from the University of Chicago and Northwestern University estimates state pension liabilities using real Treasury yields to calculate the funding required to pay off liabilities over 30 years. Their study puts the price of not reforming KPERS at either an 11.7 percent tax increase, an 11.7 percent funding reduction for schools, social services and other government functions or some combination of the two.
Clearly, major reform is needed.
Many options exist to reduce benefits and still provide a more lucrative retirement plan than most taxpayers receive. The current defined benefit plan allows someone with 35 years’ service and final average salary of $50,000 to retire with about the same take-home pay, including Social Security. A defined contribution 401(k) plan should be created for new hires. Benefits for those still working can be modified, the early retirement age can be increased and other oddities can be eliminated, such as “double-dipping,” buying discounted service credits and the special treatment afforded legislators.
Kansas is already suffering economic stagnation and job loss from a growing tax burden. Indeed, Kansas is the only state whose 2011 average annual private sector employment level is lower than 2010. State and local taxes increased at nearly twice the level of inflation over the past 10 years, and that doesn’t include the full impact of the sales tax increase. There simply is no room for another straw on the camel’s back.
Another year like 2008 would create a high probability that underfunded pension plans such as KPERS will eventually default on their obligations.
Political pressure to protect these lucrative, unsustainable benefits will be intense, but the choice is crystal clear — enact major pension reform or pick between double-digit funding cuts or job-killing tax increases.
With all of this in mind, we hope the KPERS Study Commission chooses wisely.
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