Plan changes implemented in 2015 designed to cut state’s overall cost
BY: TIM CARPENTER. Kansas Reflector
TOPEKA — The Kansas Legislature’s auditors say the Kansas Public Employees Retirement System plan available to the state’s government employees hired since 2015 has higher worker contribution requirements, a longer vesting period and lower financial rewards than plans in comparable states.
Auditors said a survey of 1,300 current and former Kansas public employees indicated people enrolled in KPERS 3 were more likely to leave their job than participants in the predecessor KPERS 1 or KPERS 2 plans. Dissatisfaction with KPERS 3 stemmed from reality of a plan delivering a lower proportion of final salary in terms of retirement benefits when compared to alternatives.
“KPERS 3, generally, gives employees less flexibility, requires them to share some financial risk and provides lower benefits than other plans evaluated,” said Cade Graber, an auditor with the Legislature’s Division of Post Audit. “KPERS 3 has higher employee contribution rates, a longer vesting period and longer retirement requirements than most other plans we evaluated.”
There has been interest among some members of the Legislature in moving all KPERS 3 members into KPERS 2, which would mean the transferred government employees would take on less financial risk in building a retirement nest egg and would secure better financial rewards at retirement. KPERS 1 and KPERS 2, versions of Kansas’ public employee retirement plan available to government employees hired from 1961 to 2014, required the state to carry the full financial risk.
Revenue to KPERS’ trust fund comes from worker contributions, employer contributions and investment returns. In 2022, the employee contribution rate was 6% of salary for all three KPERS tiers.
From 2002 to 2022, the audit said, 49% of revenue to KPERS came from investment returns. During this time, 35% came from employer contributions and 16% came from employee contributions.
A national recession in 2008 produced four consecutive years of investment losses for KPERS and reduced the system’s funded ratio, or the percentage of liability the trust fund’s assets covered, to 56% in 2012. With sustainability of the trust fund in doubt, the 2012 Legislature and Gov. Sam Brownback agreed to launch KPERS 3. It was structured in a way that would increase KPERS’ funded ratio by lowering future costs to the state.
Members of KPERS 3 by law were guaranteed 4% annual earnings on their personal account balances, but additional retirement benefits to these city, county or state employees would be dependent on performance of the pension system’s investment portfolio. Neither KPERS 1 nor KPERS 2 placed that investment-return risk on the back of public employees.
KPERS 3 covers employees hired on or after Jan. 1, 2015, with the exception of state correctional officers who were placed in KPERS 2. This section of KPERS has 73,600 active members in government jobs, 44,000 inactive members no longer in a KPERS-covered position but not retired, and 4,000 retirees.
“By design, it’s doing what it was intended to do,” said Alan Conroy, executive director of KPERS. “It’s cheaper for the employers, but I think one important difference between KPERS 3 members and let’s say a 401(k) plan in the private sector is a KPERS 3 member never loses what they put in. They’re guaranteed 4% income.”
Overall, KPERS’ funded ratio climbed from 67% in 2015 to 73% in 2022 because the trust fund’s assets increased at a greater rate than its liabilities during the period.
Auditors said it wasn’t clear whether the transition to KPERS 3 or the overall positive direction in investment markets was responsible.
In December 2022, KPERS had $26.4 billion in actuarial assets and $36 billion in liabilities. Depending primarily on performance of the system’s investment portfolio, KPERS said it could be possible for the system to reach a 100% funded ratio by 2039.
Sen. Mike Thompson, a Shawnee Republican on the Legislature’s joint House and Senate audit committee, said an important consideration for the Legislature was whether KPERS 3 was competitive with what was commonly offered by private-sector employers in Kansas. He said the retirement plan presented to government workers in Kansas had to budgetarily responsible.
“Obviously, we want to retain employees. We want to give them the benefit. We’ve got to be realistic about what we’re competing against,” Thompson said.
The audit said KPERS 2 was created in 2007 and covered government employees hired from July 1, 2009, to Dec. 31, 2014. There are 23,800 active members, 11,000 inactive members and 2,900 retirees.
KPERS 1 was adopted at formation of the state retirement system in 1961 and guaranteed benefits slightly more generous than KPERS 2, the audit said. It has 46,500 active members, 18,200 inactive members and 95,200 retirees.