Local units of government across Kansas may need to dig deeper into their budgets to cover changes to the state pension system that will push up their employer contribution rates in 2019.
In November, the KPERS board of trustees cut assumptions about how much the KPERS system can expect to earn long-term on investments.
Return on investments is one source of revenue for the state retirement system. The other sources are employee and employer contributions.
Kristen Basso, spokeswoman for KPERS, said the change puts Kansas better in line with the national trend among public pension systems.
In recent years, many public pension systems have lowered their anticipated investment returns. According to a February report from the National Association of State Retirement Administrators, more than half of 127 plans tracked by the association have cut their return assumptions since fiscal 2008.
As of the reportís publication, the average assumption among these plans was 7.62 percent. Kansas is lowering its rate from 8 percent to 7.75 percent.
Getting the rate right is important, the report indicates. If the return assumption is too low, it exaggerates a pension systemís liabilities and costs. This results in taxpayers today being overcharged and taxpayers in the future being undercharged. Yet, if the assumption is too high, it understates liabilities, shifting the burden too far in the other direction.
Kansas has used the 8 percent assumption for three decades. The actual return on investment over the past 25 years was 8.4 percent.
Basso said, however, that past investment returns donít predict future performance.
Changes coming in 2019
KPERS has informed local governments by email that the drop in the assumed return rate will push up employer contribution rates starting in 2019. They have been told to expect:
ē A 0.68 percentage point increase in the rate for KPERS, the Kansas Public Employees Retirement System.
ē A 1.93 percentage point increase in the rate for the Kansas Police and Firemenís Retirement System.
These rates are an initial projection and may change.
Other factors also make it difficult to project the exact added expense for local units of government, including the fact that wages will change between now and 2019.
Two decades of underfunding
Basso said the 2019 changes followed months of actuarial and investment analyses ó part of an asset liability study that occurs every three years.
She indicated the changes arenít related to the stateís massive unfunded retirement liability.
Kansas is trying to dig its way out of an $8.5 billion hole ó the gap between the retirement systemís resources and the retirement benefits promised to public employees.
This gap is often expressed as a percentage ó the percent of liability that is funded versus unfunded. The most recent actuarial valuation, according to a briefing prepared for the 2017 Legislature, indicates the liabilities are currently 67 percent funded.
For two decades, public employers paid less into the retirement system than required by actuarial assessment (except in the case of contributions for the pensions of judges, police and firefighters).
According to KPERS, this stems from a 1993 state law that sought to phase in the burden of rising benefit costs by asking public employers to pay amounts that were capped lower than actuarially required rates.
Year by year, unfunded liability ballooned. As of 2015, local governments were required to start paying the actuarially required rate. The state continues to pay in lower amounts for its employees and for public school teachers.
Basso said Kansas is on a schedule to eliminate unfunded liability by 2033. This hinges on realizing investments, however, and on employers depositing contributions as planned.
The 2019 change in assumed investment returns doesnít affect the schedule for closing the gap, she said, nor does it affect employee contribution rates.
However, separate statutory changes in recent years have raised those rates for many public employees.
Meanwhile, the state will need to pump significantly more into KPERS this year than last year, a matter that has some lawmakers worried.
Last spring, amid troubled state finances, the Legislature and Gov. Sam Brownback collaborated to postpone the stateís quarterly KPERS payment of nearly $100 million. This, combined with other factors, means the Legislature will need to inject about $660 million into KPERS in 2017 ó $177 million more than in 2016.