Controversy over the state of Kansas’ KPERS retirement system seems to be a perennial part of the legislative process. Each year seems to bring new legislative proposals which cause anxiety among KPERS participants… both current employees who are paying into the system and retirees who are now receiving benefits.
The problem started years ago when the Kansas legislature began to shirk its statutory responsibility for funding KPERS. While employees were required to contribute the entire percentage of their pay they had originally agreed to, the legislature shorted KPERS by making a smaller employer contribution than the state had agreed to. That contribution rate had been calculated back then as the amount necessary to keep KPERS solvent.
Over time the legislature’s underfunding created a huge problem for KPERS and the result was a retirement system which was billions of dollars away from being actuarially sound. That posed a real threat to the future retirement benefits of thousands of state and local government employees. Fortunately the legislature in 2012 recognized that something had to be done and a law was passed that increased contribution rates for both employers and employees. It was designed to eventually return KPERS to fiscal health, and that will happen if this and future legislatures live up to their commitment. I was pleased to vote for the bill back then, and I consider it the most significant piece of good government legislation to come out of that session.
The budget which passed the legislature last week gives Governor Brownback the flexibility to delay the fourth quarter payment into KPERS (due by the end of the fiscal year on June 30) until later in the new fiscal year. But if he does that (and I believe the dire fiscal circumstances of the state will force him to do so) then the delayed payment must be made into KPERS, with 8% annual interest, no later than September 30.
This is not the same thing as borrowing from KPERS, which implies that the state would be withdrawing past contributions to KPERS and using them for other purposes. That has not happened and will never happen. The IRS has very strict rules governing retirement plans such as KPERS, and withdrawing previous contributions would be a clear violation of those rules. It would put the entire system in jeopardy. From the perspective of the IRS, that is a much more serious event than diverting contributions before they go into KPERS.
The truth is KPERS is the only absolutely secure lockbox in Topeka. The IRS regulations make it impossible for any legislature or governor to start using KPERS as a piggy bank. If contributions are delayed or reduced, that means it will take longer for KPERS to reach fiscal soundness but it does not put anyone’s retirement at risk in the foreseeable future. Unfortunately that is exactly what is currently happening. In fiscal year 2014 Governor Brownback reduced the state’s contribution to KPERS. And the budget passed just last week continues that practice for FY 2016 and 2017. By doing so the state is delaying the date at which KPERS becomes solvent. That fact alone was reason enough for me to vote no on the budget.
However there is another reason to be concerned about delaying or reducing state contributions. Doing so is a huge red flag regarding the fiscal situation the state is currently in. If we can’t afford to make four quarterly KPERS payments this fiscal year, what are the odds we will be able to make five payments plus interest on one of them in the next fiscal year? The fact that this move is even being contemplated is a manifestation of a serious fiscal crisis within state government.
Aside from the fiscal red flag there is another troubling aspect to this practice. Agreed-to KPERS contribution rates constitute an agreement between employer and employee. For the state of Kansas to shirk its responsibility and reduce its current or future contribution rates while employees and other government employers are making their full contribution represents a serious breach of ethics and may in fact be illegal. We ought not to do that.