Last year, a sharp decline in the value of its assets led the funding ratio of the Kansas Public Employees Retirement System to plummet to just 49%, increasing its unfunded liabilities to $10 billion. In response to this precipitous drop, the Center for Applied Economics at the University of Kansas School of Business this past month released a 13-page technical report on The Funding Crisis in the Kansas Public Employees Retirement System. They explain:
“The recent collapse of financial markets has resulted in a significant decrease in the value of the KPERS portfolio. But, the funding crisis in KPERS is not just the result of problems in financial markets. The problems in this defined benefit pension plan have emerged over several decades, and are symptomatic of the poor incentive structure
guiding the governance of many defined-benefit public pension plans. The financial market turmoil has exacerbated these problems, but KPERS is facing a long-run
deterioration in its funding status.
“The Kansas legislature has enacted several reforms over the past decade to address the KPERS funding problems. These reforms have included changes in benefits, increased
contribution rates, and administrative changes. Unfortunately, these reforms have failed to address the fundamentally flawed incentive structure built into the KPERS defined-benefit plan.
“This study explores current and past funding shortfalls in KPERS and the inherent challenges associated with the governance of defined-benefit pension plans. The study examines different measures of the magnitude of the funding shortfalls and the past legislative attempts to provide remedies.
“Some of the key facts and issues are:
• A sharp decrease in the value of assets in the KPERS system last year caused the funding ratio to fall to 49 percent. Unfunded liabilities in the system doubled, from about $5 billion to $10 billion.
• Assuming an eight percent return on assets, Kansas-government employers would have to significantly increase contribution rates to bring the KPERS system into actuarial balance. This would be difficult for state and local employers that are experiencing a revenue shortfall.
• KPERS is bankrupt under current operating assumptions. Using more realistic assumptions regarding the expected rate of return on assets, it is highly unlikely that the KPERS system will achieve actuarial balance over the appropriate time frame.
• The solution to the funding crises in KPERS will require fundamental reform. Everything should be on the table, including changes in benefits and increased employee contribution rates, as well as increased employer contribution rates. The governments of Kansas should also explore a complete shift to a defined-contribution arrangement, similar to the one used by the Kansas Regents system (and most private employers).”
For more details and analysis, see the technical report.