The 1965 Beatles song written by Paul McCartney and John Lennon could have just as easily been written by Governor Brownback concerning the Kansas state pension plan (KPERS).
A short two years ago the legislators decided it was time to stop “kicking the can down the road” concerning the solvency of the KPERS pension plan, and actually do something to properly fund the retirement plan of some 275,000 employees in the state of Kansas. After all, the KPERS website strongly states that it is their “fiduciary promise to you… always putting your interests first, and that your retirement funds are safe.” Of course when government officials make statements like “We can fix this if we work together,” the real translation may be “We messed up and you’re going to have to pay for it.”
The plan, which Governor Brownback touted as one of the biggest accomplishments in his first term, required employees to increase contributions from 4 to 6% over a 2 year period. This was a way to erase the $7.4 billion deficit by the year 2033. Right now the state’s Unfunded Actuarial Liability (what they owe the KPERS employees) stands at 64%, the second lowest in the nation. Although using an aggressive 8% rate of return in their assumptions, this legislation was at least a step in the right direction.
Fast forward to December of 2014 when the decision was made to cut contributions to the pension plan by more than $40 million in the next 6 months to help fund the $279 million state budget deficit. This is not a new technique, as governors (and legislators) have underfunded the retirement program for years.
The “Vested Interest” newsletter on the KPERS.org website states that retirees have nothing to worry about, as they have over $16 billion in assets, and are receiving contributions of just under $1 billion per year. Unfortunately, the number that is omitted is what’s being distributed to current retirees each year, a number that is $400 million more than what is coming in. Alan Conroy, executive director of KPERS, in 2013 stated that if strong investment returns continue, everything will be fine. The only problem with this is that investment returns are not always strong, as proven by the 2008-2009 years when KPERS lost over $1 billion in assets.
Sub House Bill 2333 passed in 2012 was not a perfect fix. Even though the percentage of employee contributions has increased by 2% as of 2015, the multiplier to calculate retirement benefits only went from 1.75 to 1.85- A 2% increase in contributions and a .10 increase in benefits. What a deal! Employees hired after 2009 also have a choice of increasing contributions to 8% or losing their cost of living adjustment (COLA), which shouldn’t be a real hard choice if they simply ask current retirees how many COLA’s they’ve received in the last 25 years. And although it was reported that the reallocating of funds would not affect current retirees, this is inaccurate. If the plan had been properly funded through the years, maybe current retirees would have received raises along the way, through the COLA benefit, instead of living on the same dollar amount from retirement to death.
In the past, there have been suggestions to correct the insolvency issues. Pushing the retirement points from 85 to 90 (this includes age and years of service), reducing benefits, implementing a defined contribution plan, etc., but the first thing any governor or legislator should do is decide to properly fund the plan and not take funds allocated to the pension plan for use elsewhere. This hasn’t been accomplished in the past, which is why the solvency of KPERS is in question now.
At retirement a choice is given to get at least 50% of your pension plan out of the KPERS program. There is not a tax consequence for this if it is rolled to an IRA. Your IRA also remains state tax free. (Make sure your accountant knows where the money came from). Careful thought should be given to this, however, as the KPERS benefit can be distributed at retirement, but the rollover IRA would have a 10% penalty if distributions are taken before age 59 1/2.
The lack of proper funding in both the state (KPERS) and federal (Social Security) retirement plans should give a notice to all to save in a personal plan not dependent on the government. Start young, contribute regularly and take your retirement success into your own hands.
It would take substantial measures to change the funding of the KPERS plan, measures that for years have not been addressed. So, although the promise from the state is that “We Can Work It Out”, if things continue the way they are, and you’re not addressing this on a personal basis, you might be singing another Beatles song.
“Help”
Tim Schumacher represents Strategic Financial Partners in Hays. [email protected]