Kansas Pension Plan Lowers Investment Forecast, Grows Shortfall
Officials with the state’s pension plan say the system's investments won’t be paying as much as they previously expected. That grows the long-term deficit in the Kansas Public Employees Retirement System and will make it more challenging to eliminate a shortfall.
Last month, the KPERS board lowered the long-term forecast for their investment returns from 8 percent to 7.75 percent. Kansas has used the assumed 8 percent return rate since 1986. The change had been under consideration for several months.
KPERS Executive Director Alan Conroy says staff members considered a variety of data points to develop the new investment forecast.
“They do look at inflation. We were looking at the equity market, looking at the bond market and the overall strength of the economy, particularly on investments,” Conroy says. “This is looking out over a long-time horizon going forward.”
KPERS invests billions of dollars it has in the bank and the return on those investments helps fund the system. At the end of 2015, KPERS assets totaled almost $17 billion. The state, other public employers and workers also pay into the system.
The lower projected rate of return grows the KPERS unfunded liability by more than $560 million, which is a 6 percent increase. The shortfall now totals more than $9 billion. That’s the difference between assets and the benefits that are owed in the future. The state has a plan to eliminate the unfunded liability, but the new forecast makes that more difficult.
Kansas is on track to pay off the vast majority of the unfunded liability by 2033, and Conroy says changing the investment forecast doesn’t change that date. However, the change means it will require larger payments into KPERS to hit the target.
The amount employers pay into KPERS is set by a formula in state law. Conroy says in a few years, the state and other public employers will have to start paying more.
“This just means the employers will have to continue to step up to meet their share of the obligations for public employees’ retirements,” he says.
Conroy says the $9 billion unfunded liability equates to a funding ratio of 65.7 percent. That's an improvement over some past years before KPERS reforms were put in place.
The retirement system includes almost 300,000 current workers and retirees. That includes teachers, state workers and local government employees.
Lowering the projected investment return doesn’t impact the benefits of current retirees. The change also won’t affect the amount that workers have to pay into the system.
The change will impact the annuitization rate for the most recent class of KPERS members. KPERS employees hired since 2015, known as KPERS 3 members, will see their rate of return reduced from 6 percent to 5.75 percent.
Conroy says it’s critical to try to have an accurate forecast instead of a projection that’s too rosy or pessimistic.
“It’s important that the board do the best that they can in terms of setting these rates. Otherwise, there’s a chance, if you set it too high or too low, you might make later generations pay more than they should have,” Conroy says.
Kansas issued $1 billion in bonds for KPERS in 2015. The goal was issuing the bonds when interest rates were low, with the assumption that an 8 percent investment return would mean the bonds would end up ultimately making money for KPERS. Conroy says the state will pay 4.68 percent interest on the bonds. As long as the KPERS fund returns more than that, Conroy says issuing the bonds will be a net positive.