Skeptics more keen to improve Tier 3 benefits available to newer public employees
By: TIM CARPENTER
Kansas Reflector
TOPEKA — Republican Sen. Michael Fagg wants to persuade the 2025 Kansas Legislature to allocate $1 billion of the state’s revenue surplus to shrinking the $9.7 billion long-term unfunded liability in the state’s pension system.
The Kansas Public Employees Retirement System, which serves more than 300,000 Kansans and possesses $27 billion in assets, years ago received legislative authorization to issue bonds so proceeds could be invested in the market to bolster the system’s bottom line.
KPERS made use of $500 million bond issues in 2004 and 2021, and a $1 billion offering in 2015.
On Wednesday, Fagg couldn’t convince the Legislature’s joint committee on pensions to get behind his idea of dedicating another $1 billion to address the system’s 30-year liability. Losses in 2022 — the return on investment was a negative 9.7% compared to a positive 15.7% in 2021 — deepened the challenge at KPERS in terms of meeting obligations on the pension-benefit horizon.
“I’m really focused on unfunded liabilities,” Fagg said. “Folks, very seldom have we had this kind of money sitting around. I’m letting you know I know the spot it ought to go.”
Sen. Pat Pettey, a Democrat from Kansas City, Kansas, said she was more interested in making use of available state revenue to enhance benefits under the modest KPERS 3 retirement plan offered to public employees since 2015.
“I cannot support this recommendation because I think we have to look at the whole picture,” she said. “We can’t underestimate the senior tsunami that is facing us.”
House and Senate members on the joint pension committee voted to encourage the 2025 Legislature to study the potential of a fourth infusion of cash to lower the unfunded liability. They decided to ask the Legislature to give thought to altering KPERS 3.
The committee agreed to recommend the Legislature once again think about giving KPERS’ retirees a cost-of-living adjustment. The panel said the Legislature ought to research expansion to other KPERS members the deferred retirement program incentivizing fire and law enforcement personnel to stay on the job rather than retire. It might be helpful, for example, in diverting the wave of teacher retirements in Kansas.
“I strongly encourage you to keep in mind … any increase in benefits that is not paid for upfront hurts the fund,” said Sen. Jeff Longbine, an Emporia Republican who didn’t seek reelection in 2024.
Tier 3, well, ‘sucks’
There is growing concern among public employees and legislators about the KPERS 3 retirement plan signed into law by GOP Gov. Sam Brownback nearly a decade ago. In an attempt to lower the burden on Kansas taxpayers, the Brownback administration settled on KPERS 3 to substantially lower financial benefits compared to KPERS 1 and KPERS 2.
A report produced this year by the Legislature’s auditing unit said KPERS 3 had higher worker contribution requirements, a longer vesting period and lower financial rewards than public retirement plans offered in comparable states. Auditors said a survey of current and former Kansas public employees showed people in KPERS 3 were more likely to leave their job than participants in KPERS 1 or KPERS 2.
In 2023, Rep. Sean Tarwater, R-Stilwell, put it this way: “I don’t think you need to do an audit to find out Tier 3 sucks.”
Public employees in KPERS 3 were guaranteed 4% annual earnings on their personal account balances, but additional benefits to these city, county or state employees was dependent on performance of the pension system’s investment portfolio. Neither KPERS 1 nor KPERS 2 deposited the investment-return risk directly on the back of public employees in Kansas.
Dissatisfaction has prompted proposals to move all KPERS 3 members to KPERS 2, which would transfer financial risk of retirement investments to the state.
$75 million IT overhaul
Meanwhile, the executive director of KPERS said the pension system was undergoing a five-year transition to a new information technology system estimated to cost $75 million.
“It’s a massive undertaking,” said Alan Conroy, executive director at KPERS. “We’ve tried to do the prep work — cleaning data, backfilling staff — so we aren’t having staff trying to work full time on the project and doing their full-time, day-to-day jobs.”
Rep. Cindy Neighbor, a Shawnee Democrat on the joint committee, said she hoped KPERS secures a modern IT platform without the spider web of problems encountered by the Kansas Department of Labor while reforming the state’s unemployment insurance system.
“So far, I think we’ve done the right steps mechanically to have a successful project,” Conroy said. “The ultimate goal, as I tell the staff, is to keep us out of the ditch. We would not want 116,000 retired KPERS members marching on the statehouse because they didn’t get a retirement benefit check because of a failure in the IT system.”
Divestment mandate
Bruce Fink, chief investment officer at KPERS, said the retirement system was in compliance with a new state law mandating divestiture from countries that posed unusual investment risks. The countries targeted by the Legislature were Cuba, Iran, North Korea, Russia, Venezuela and China, including Hong Kong. The law compelled state agencies to complete divestiture transactions by Jan. 1, 2026.
“We’ve not identified any trade violations since the act became effective,” Fink said. “We’ve augmented our due-diligence process for new and future investments to confirm that the countries in which potential future managers may invest in will not … be organized in countries of concern.”
In response to enactment of the law on July 1, he said KPERS terminated investments in China and Hong Kong. That involved divesting 12 securities in 10 companies valued at $294 million, he said.
Fink said KPERS retained 300,000 shares of Norilsk Nickel, Russia’s leading metals mining company. He said trading of the stock was halted in conjunction with Russia’s invasion of Ukraine.
“There were sanctions put in place,” he told legislators. “We continue to hold those shares in our accounts, but they are currently valued at zero market value.”