Earlier this year, we took a deeper look at the history of Kentucky pensions. Fraught with years of underfunding, legislative tax breaks and subsidies to corporations, Kentucky’s pension systems are underfunded. Kansas was in a similar situation, but in recent years they’ve looked to right their wrongs.
Part two of our historical guide series takes a look at the Sunflower State and its history with public employee pensions.
Background on KPERS
In 1961, the state of Kansas established the Kansas Public Employee Retirement System (KPERS) – a defined benefit pension for all public employees in the state. According to the National Association of State Retirement Administrators (NASRA), KPERS has over $21 billion in assets, 154,573 active members, and 105,449 annuitants. KPERS is broken down into the following tiers and systems:
KPERS Tier 1: Hired before July 1, 2009
KPERS Tier 2: Hired between July 1, 2009 – Dec. 31, 2014
KPERS Tier 3: Hired after Jan 1, 2015 – commonly referred to as the cash balance plan
Kansas Police and Firemen’s System
2009 Reforms and the Creation of Tier 2
When the housing bubble burst and the stock market crashed between 2007-2009, many pension plans across the country had to make some hard choices. Unfortunately, many of them, including Kansas, saw their unfunded liabilities increase. According to the KPERS valuation report of 2011, KPERS unfunded liability dropped from 85 percent funded in 2001 to 59 percent funded in 2011. In 2009, lawmakers moved quickly to enact reforms of the system. Instead of looking at corporate loopholes or tax breaks, lawmakers decided to increase employee contributions to the plan from 4 percent to 6 percent, increase the years of service required, and increase the final average salary from 3 years to 5 years.
These changes sought to stop the inevitable bleeding from the market crash but came up too short since investment in the fund by lawmakers varied.
2012 Reforms and the Creation of a Cash Balance Plan (Tier 3)
In 2012, lawmakers passed HB2333, which created a third tier for KPERS. Although the bill was passed in 2012, it did not take effect until January 1, 2015. HB2333 created a cash balance-style retirement system for all state and local government employees. We’ve covered cash balance plans before and how they do not provide public employees with an adequate retirement. Typically, pension plans seek to replace up to 50 percent of a retiree’s final salary, but with cash balance plans, it can be much lower.
According to the National Council on State Legislatures, Kansas’ cash balance plan is set up much like a 401(k), except employees don’t get to decide where their money is invested. Employees contribute 6 percent of their pay to their plan, but employer contributions vary depending on the years of service of the employee: 4 percent at 5 years, 5 percent at 12 years, and 6 percent at 24 years. At the end of their careers, the amount in the employees’ cash balance account is annuitized or members can withdraw up to 30 percent of their balance in a lump sum. With such low contribution rates from employers, being personally responsible for the whims of the market and KPERS’ board investment strategy, many public employees will not be fully prepared for a secure retirement.
This year, we expect more data to appear on the failings of Kansas’ cash balance plan, so be sure to follow Defined Benefit for more information.
Brownback Tax Cuts
In 2011, Governor Sam Brownback took office. Along with ushering through the creation of a cash balance plan (Tier 3) for public employees, Brownback sought to create a “conservative dream” by slashing taxes to the bare bone. According to the Brookings Institution, “The Brownback plan aimed to boost the Kansas economy, but instead led to sluggish growth, lower than expected revenues, and brutal cuts to government programs.” Much like President Ronald Reagan’s “trickle-down economics,” Brownback sought to spur growth throughout the state with severe tax cuts. The cuts even included a 0 percent tax on limited liability corporations (LLCs). The cuts did not spur growth and destroyed state revenues.
In response to a large decline in state revenues, Brownback and the conservative state legislature cut funding for schools, social services, and skipped, deferred, and partially paid into KPERS for years, ultimately hurting the unfunded liability even more.
Brownback’s experiment came to an end in 2017 when the Republican state legislature voted to raise taxes to shore up revenues. Brownback vetoed the legislation, only for the tax measures to be overturned by the legislature. Although taxes were raised, severe damage had been done to KPERS.
2019 Legislative Session
In 2018, Kansas elected Laura Kelly governor. Kelly, a former Democratic state senator from Topeka, fully funded KPERS in her first budget. In a move to shore up the fund, the conservative legislature passed SB 9 that sought to pay back $115 million borrowed from KPERS during the Brownback years. At the end of the legislative session, the legislature added an additional unscheduled $51 million to KPERS as well, bring the total of additional funds to $166 million.