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Kansas lawmakers have put $1 billion into KPERS, so why is the pension fund debate just heating up?

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Major changes are being considered at the state’s pension fund, ones that could impact its fiscal outlook and relations with the Legislature — even as lawmakers voted to add $1 billion to its coffers.

The KPERS Board of Trustees is weighing a controversial decision to reduce the estimated profit generated by the pension fund’s investments, a metric dubbed the assumed rate of return.

Kansas currently projects its investments will bring in 7.75% each year. Officials voted to reduce the assumed rate of return in 2016, dropping it from 8% previously.

But even with that move, Kansas has the highest assumed rate of return in the country, according to data compiled by the National Association of State Retirement Administrators.

It is important to note that each state sets its rate of return differently and investments will often look different depending on where a person is in the country, rendering an apples-to-apples comparison difficult.

Officials have long considered furthered reductions, however, but many critics warn of serious consequences if the move is pursued too aggressively.

That could include growing the state’s pension debt, as well as an increase in the share of retiree benefits state and local governments pay out.

“I agree with the possibility that it might need to be lowered,” said Ernie Claudel, a former teacher and administrator and member of the KPERS board. “But I don’t think it needs to be lowered abruptly and I don’t think it needs to be lowered quickly.”

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What effect would a rate of return change have on KPERS?

Despite the concerns, fiscal experts generally agree it makes sense to have a measured assumed rate of return, keeping expectations realistic for how well investments will perform.

“There’s a lot of people out there saying this is way too high,” Ryan Trager, an Olathe firefighter and member of the board of trustees, said during an April meeting, the Kansas Reflector reported.

Importantly, the assumed rate of return does not have any bearing on the investment performance.

Indeed, it is common for the investments to outpace expectations, as it did in 2021, when it had a record 26% return. Conversely, during recessions, the reverse can be true and performances can fall short.

Over the last quarter of a century, the state has averaged 7.8% returns, roughly the assumption rate.

And Rep. Steven Johnson, R-Assaria, chair of the House Insurance and Pensions Committee, said Kansas usually outperformed its peers in the quality of its actuarial prowess, meaning it was not unreasonable to believe it could withstand a slightly higher return rate.

In the past, KPERS has explored a potential reduction to 7.5% or 7.25%. But consultants recommended a reduction of an entire percentage point to 6.75%. 

“I don’t see any sense of dropping it so quickly,” Claudel said.

A more measured reduction, dropping the rate of return over a longer period of time, is on the table also when the KPERS board again considers the idea in its May meeting.

The idea has garnered some support, though Jim Zakoura, who chairs the KPERS board, said the trustees may well defer a decision to the next fiscal year.

“They felt that this group needed additional information before they made any further decision,” he said.

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Any eventual decision, however, would impact the $5 billion-plus unfunded liability, or the difference between money the level needed to fully fund pension contributions and the amount of funds actually socked away into KPERS.

In effect, lowering the return assumption would mean more money would ultimately need to be put in by the state and it would lengthen the projected amount of time needed to pay off the current debt.

Because of how the state’s pension plan for firefighters and police is structured, Johnson added Kansas would have to pay much more in order to fund the more generous benefit.

“That change could make funding KP&F very challenging,” he said.

Concerns abound about legislative skepticism

Meanwhile, there is a separate concern that changing the rate of return — and the corresponding impact it might have on the state’s unfunded liability — will prove demoralizing to legislators.

There was even a desire on the part of some Republicans to hold off on a vote on whether to put over $1 billion into KPERs — a move with broad bipartisan support — until after the board of trustees rendered a decision.

“You tweak the rate of return and all of a sudden it looks like that money (the $1 billion) evaporated,” Senate President Ty Masterson, R-Andover, told reporters. “Now the unfunded liability goes up because of a vote on the board, not because we don’t have money in the fund. It changes everything.”

Lawmakers eventually wound up reversing course and approving Senate Bill 421, anyway, sending the legislation to Gov. Laura Kelly, who is expected to sign it. 

“There’s been extraordinary support from the legislature and administration,” Zakoura said.

But concerns remain that an abrupt change will still rankle legislators.

After years of missed payments in the mid-2010s — an exacerbation of a trend that dates back to the 1990s — lawmakers have finally returned to prioritizing KPERS.

At its nadir, the unfunded liability was worse than almost every other state. Greater legislative contributions and improved investment returns after a dip during the Great Recession have helped to stabilize the situation, however.

But Johnson has cautioned that discouraging legislators could decrease the appetite for continuing to boost the pension fund going forward.

“It’s the Lucy and the football thing … the carrot keeps moving ahead to try and get there,” Johnson said. “That feeling is very real to say, ‘Oh, we got it — no, we didn’t.’ And that is the frustration that folks feel as they worked to make challenging decisions on a number of budget areas and then not get the sense of reward of hitting the goal.”

Andrew Bahl is a senior statehouse reporter for the Topeka Capital-Journal. He can be reached at abahl@gannett.com or by phone at 443-979-6100.