Voice For Liberty

Category: Kansas state government

  • Economist: KPERS must undergo serious reform

    This morning in Wichita Barry W. Poulson, retired professor of economics at the University of Colorado, said that Kansas legislators are finally starting to realize the importance of dealing with the unfunded liability in the Kansas Public Employees Retirement System (KPERS), but cautioned that proposals currently in the legislature don’t contain the fundamental cost-saving reforms that are needed and that other states are implementing.

    Poulson’s visit to Wichita was sponsored by the Kansas Policy Institute. Poulson authored the report A Comprehensive Reform of Kansas Public Employees Retirement System for KPI.

    In his introduction of Poulson, KPI President Dave Trabert said that the KPERS deficit that is usually mentioned — $7.6 billion — is too low. The real deficit is at least $12 billion, he said. The difference comes from two sources: first, there are nearly $2 billion in losses that don’t have to be included in the official figures, at least not yet. Then, KPERS uses an assumption of eight percent for its future investment returns to arrive at the $7.6 billion figure. Trabert says that even KPERS understands it will not be able to achieve that rate. Using a rate of seven and one-half percent, the deficit blooms to $12 billion, and even that rate may be too high.

    In his remarks, Poulson said that the Government Accounting Office estimates that state and local governments will incur, over the next half-century, $10 trillion in debt. Most of that is due to unfunded liabilities in pension and retiree health plans for public employees, he said. Some of the debt issued by state governments has been downgraded to “junk” status. 84 municipal governments went bankrupt last year.

    Poulson said that economists estimate that over the next decade, there is a high probability that pension plans in a dozen states will not be able to meet their obligations. Kansas is one of those states, having one of the worst pension plans, considering its ability to meet its obligations.

    An important point that Kansans should know, Polson said, is that KPERS is in worse shape than has been reported. The “smoothing” actuarial technique used by KPERS means that $1.7 billion in unfunded liabilities are not yet officially recognized. The eight percent return on assets used as an assumption is not realistic, too. Using a return of five percent means the unfunded liabilities are much greater.

    Poulson explained that under current Kansas law, the state is not able to meet the unfunded liabilities of KPERS. Liabilities grow more rapidly than assets. The contribution the state currently makes to KPERS is about nine percent of total payroll. If Kansas wants to satisfy government accounting rules regarding covering the unfunded liability, it would have to increase this rate to about 15 percent. In dollar terms, this is an additional $250 million per year. (To place that in context, the one cent per dollar increase in the statewide sales tax last year was estimated to bring in about $300 million additional revenue per year.)

    This amount is what is needed to just to pay off the unfunded liability, not the total cost of providing KPERS benefits.

    If trends continue, Poulson said that by the 2020s the state would have to contribute 24 percent of payroll to KPERS. Spending at this level would require large cuts to programs or large tax increases.

    Some states have successfully reformed their state pension plans, and Kansas needs to look at these states as models. The most important reform. Poulson said, is to replace the present defined-benefit plan with a defined-contribution plan, commonly known as a 401(k) plan. The private sector has been doing this for the last three decades, he said.

    Part of the problem is that legislators have refused to recognize the problem with state employee pension plans. Poulson recounted how six or seven years ago he told Kansas legislators that they needed to pay attention to KPERS and its problems, and to start addressing the unfunded liability. But legislators assured him that KPERS was fine, and there was no cause for worry. “I couldn’t get anyone to listen to me,” he said. Now, he said legislators in Kansas are finally addressing the problem, although still not properly, he added.

    Critics say that if states offer defined-contribution instead of defined-benefit plans to new employees, they won’t be able to pay off the unfunded liabilities of their defined-benefit plans. Poulson pointed to Michigan as an example of a state that switched to defined-contribution plan, and has improved its ratio of assets to liabilities, meaning the unfunded liability problem is less severe.

    Eight states have a hybrid-contribution plan, which have both defined-benefit and defined-contribution aspects. Utah was in a position similar to Kansas, and after implementing a hybrid plan, is on the track to paying off its unfunded liability.

    Another reform that states, especially Kansas, must consider is that the burden of retiring the unfunded liability must be born not only by taxpayers and new employees. Current employees and retirees must help, too. Employees must increase their contributions. Retirees need to accept less generous cost of living adjustments. The retirement age and the years of service needed to qualify for benefits both need to be raised. The way that final average salary, a component of benefit calculations, needs to be reformed too. Currently workers may use overtime or other techniques to raise their final average salary so that they receive a larger pension benefit.

    Poulson noted that Kansas legislators are finally starting to “get it” as far as realizing the seriousness of the KPERS problem. There are two bills active in the current session of the legislature. The bill passed by the House of Representatives places new employees in a defined-contribution plan, while the Senate bill keeps the present defined-benefit plan. Neither bill, however, includes fundamental cost-reducing reforms mentioned above and that are happening in other states.

  • Kansas governor should veto arts commission funding

    As the Kansas Legislature returns to work this week, it’s possible that funding for the Kansas Arts Commission could make it into the budget appropriations bill that will eventually be sent to Governor Sam Brownback. If so, the governor should use his discretion and line item veto power to cancel this funding.

    It’s not only a financial matter, although this factor alone is reason enough to cancel this funding. The arguments of supporters of this funding, small amount that it is, illustrate some of the worse aspects of government and public policy.

    Government funded arts supporters promote the government funding as an investment that pays off for Kansas taxpayers. They have studies that say it does. But these studies have little credibility, as shown in Arts funding in Kansas. These studies purportedly show that spending on the arts has a magic power that is not present when people spend their own money on the things they value most highly. But these studies, like most, rely on several economic fallacies. Henry Hazlitt, writing in Economics in One Lesson, explains.

    Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics or medicine — the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for then plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

    The proposed funding for the arts commission is a clear illustration of the problem with many pleas for public funding. A small group of people will benefit powerfully from this spending. What about the rest of us? Government-funded arts supporters make the case that the cost of the funding is just 29 cents per person in Kansas. Who of us will get worked up over such a small cost?

    The Public Choice school of economics calls this the problem of concentrated benefits and dispersed costs. It’s a huge problem.

    Besides the financial aspects of government funding of arts, there’s the artistic issue itself. There are very important reasons to keep government away from art. Lawrence W. Reed wrote in What’s Wrong with Government Funding of the Arts? of the harm of turning over responsibility to the government for things we value and find worthwhile:

    I can think of an endless list of desirable, enriching things in life, of which very few carry an automatic tag that says, “Must be provided by taxes and politicians.” Such things include good books, nice lawns, nutritious food, and smiling faces. A rich culture consists, as you know, of so many good things that have nothing to do with government, and thank God they don’t. We should seek to nurture those things privately and voluntarily because “private” and “voluntary” are key indicators that people are awake to them and believe in them. The surest way I know to sap the vitality of almost any worthwhile endeavor is to send a message that says, “You can slack off of that; the government will now do it.” That sort of “flight from responsibility,” frankly, is at the source of many societal ills today: many people don’t take care of their parents in their old age because a federal program will do it; others have abandoned their children because until recent welfare reforms, they’d get a bigger check if they did.

    The boosters of government arts funding in Kansas make the case that arts are important. Therefore, they say, government must be involved.

    But actually, the opposite is true. The more important to our culture we believe the arts to be, the stronger the case for getting government out of its funding. Here’s why. In a statement opposing the elimination of the Kansas Arts Commission, former executive director Llewellyn Crain explained that “The Kansas Arts Commission provides valuable seed money that leverages private funds …”

    This “seed money” effect is precisely why government should not be funding arts. David Boaz explains:

    Defenders of arts funding seem blithely unaware of this danger when they praise the role of the national endowments as an imprimatur or seal of approval on artists and arts groups. Jane Alexander says, “The Federal role is small but very vital. We are a stimulus for leveraging state, local and private money. We are a linchpin for the puzzle of arts funding, a remarkably efficient way of stimulating private money.” Drama critic Robert Brustein asks, “How could the [National Endowment for the Arts] be ‘privatized’ and still retain its purpose as a funding agency functioning as a stamp of approval for deserving art?” … I suggest that that is just the kind of power no government in a free society should have.

    We give up a lot when we turn over this power to government bureaucrats and arts commission cronies. Again I turn to David Boaz, who in his book The Politics of Freedom: Taking on The Left, The Right and Threats to Our Liberties wrote this in a chapter titled “The Separation of Art and State”:

    It is precisely because art has power, because it deals with basic human truths, that it must be kept separate from government. Government, as I noted earlier, involves the organization of coercion. In a free society coercion should be reserved only for such essential functions of government as protecting rights and punishing criminals. People should not be forced to contribute money to artistic endeavors that they may not approve, nor should artists be forced to trim their sails to meet government standards.

    Government funding of anything involves government control. That insight, of course, is part of our folk wisdom: “He who pays the piper calls the tune.” “Who takes the king’s shilling sings the king’s song.”

    A few years ago when I read Rhonda Holman’s editorial City can be proud of its arts work in the July 15, 2008 Wichita Eagle — which starts with the stirring reminder that “The arts fire the mind and feed the heart” — I hoped that perhaps she was going to call for less government involvement in the arts. I thought she would argue that anything so important to man’s nature should not be placed in the hands of government.

    But my hopes were not realized, because soon she described the City of Wichita’s commitment to permanent spending on arts as “a bold and even brave investment in quality of life.” It appears that even the yearnings of our hearts and minds are subject to government management and investment — and, worst of all, control.

    “Government art.” Is this not a sterling example of an oxymoron? Must government weasel its way into every aspect of our lives? Governor Brownback can do the human spirit and all the people of Kansas a favor by vetoing government funding of the arts in Kansas.

  • Kansas unemployment rate steady, employment up

    Recent figures show that while the unemployment rate in Kansas is unchanged at 6.8 percent (seasonally adjusted), the good news is that the number of people in the labor force and the number of people working is rising.

    While we often focus on the unemployment rate, it is just one part of the picture. The other is the size of the labor force, which is defined as those who are working plus those who are looking for work. If the labor force is increasing in size and the unemployment rate is steady, it means that the number of people working is rising. According to Bureau of Labor Statistics, 1,402,992 people were working in Kansas on March 1, 2011 (seasonally adjusted). The same statistic from one year ago was 1,397,819.

    The chart below shows the Kansas labor force in blue, measured against the left scale. The unemployment rate is in red, measured against the right scale.

    Kansas employment statisticsKansas employment statistics.

  • Kansas Bioscience Authority, protected

    This year the Kansas Bioscience Authority has come under scrutiny for a variety of reasons, including salaries, bonuses, and expenses paid by the authority. Especially troubling is revelation that money we all thought would be invested in Kansas businesses had no such requirement, as can be seen in this video of CEO Tom Thornton. Dion Lefler of the Wichita Eagle has other reporting on the KBA.

    The problem with public-private partnerships like the KBA is that they are, in one sense, expected to operate like a private business, but they don’t have the freedom to operate as such. They also don’t have the same motivations and incentives that guide true private enterprise, namely profit and loss. Instead, we see agencies like KBA reporting their impact in terms of “return on investment.” For example, KBA claims: “Including estimated wages of jobs, that represents a $9.41 return to the state’s economy for each $1 invested by the KBA!” This “investment” by the KBA is nothing like the investments that business and individuals make.

    There’s also the issue of covering for the KBA by leadership of the Kansas Senate, specifically Steve Morris and John Vratil, as Alan Cobb details below.

    Kansas Senate Leadership needs to answer for KBA protection

    By Alan Cobb, Americans for Prosperity

    First the good news.

    Kansas Bioscience Authority (KBA) CEO Tom Thornton resigned under pressure today.

    Much credit goes to Gov. Sam Brownback and especially Sen. Susan Wagle who brought to public attention a slew of conflict of interest and other inappropriate behavior by Thornton and others at the KBA.

    It is of little surprise the Johnson County District Attorney’s office is investigating the KBA. Wagle is totally vindicated and Kansas taxpayers owe her a big debt of gratitude.

    Now the bad news.

    From what we know so far, what’s happened at the KBA is a textbook case of what not to do at a public agency.

    Thornton’s wife was receiving a $107,000 salary as an administrative assistant. The state of Kansas paid for a $1 million life insurance policy for Thornton’s ex-wife. The KBA invested $50 million to venture firms out of state with little oversight. The KBA invested in companies whose executives couldn’t be located by state officials. Many people in the know said an investigation of KBA and Thornton was “long overdue” and the KBA offices in Olathe were a “shrine” to Thornton.

    And this is someone being praised and protected key members of Senate Leadership, President Steve Morris and John Vratil? Just last month Morris said he was 100 percent behind the ousted KBA leader. Morris recently said that the KBA was an “icon for the state.”

    What planet do these guys live on?

    Vratil and Morris sat in the hearings conducted by Wagle, certainly as a show of support for Thornton and for disdain for Wagle and much-needed oversight of KBA.

    The protection given Thornton by Senate leadership even after his resignation today is astonishing.

    The question is what else is being hidden and why are Morris and Vratil so willing to fall on their swords for Thornton and his corrupt behavior?

    That’s the 800-pound rat in the middle of the room that’s eaten some bad Danish cheese.

    Kansans are waiting are waiting for answers.

  • Kansas economic indicators not rising

    Economic indicators from the Federal Reserve Bank of Philadelphia indicate that the Kansas economy is not yet in a state of sustained recovery from the recession.

    KSPHCI is the Coincident Economic Activity Index. It includes four indicators, according to its creators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing, and wages and salaries. This is the index of current economic activity in Kansas. It’s plotted in blue, and measured against the left axis. Data is through February 1, 2011.

    The course of the index over the past five years clearly shows the effect of the recession. It also shows a recovery, but also a slow drift downwards over the past several months, having reached its most recent maximum in June, 2010.

    KSSLIND is the leading index for Kansas, which predicts the six-month growth rate of the state’s coincident index. According to its creators, in addition to the coincident index, “the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.” This index is plotted in red, and measured against the right axis. Data again is through February 1.

    This index, which is again a leading indicator with a six-month time lag, has lately hovered around zero or, in the case of the last six months, negative values. This explains why the current economic activity index is not rising.

    Today the Kansas consensus revenue estimating group meets to arrive at a forecast of revenue for the next fiscal year, and perhaps adjusting the estimates for the last few months of the current fiscal year (2011, which ends on June 30, 2011). It will be interesting to see how this group’s estimates compare to KSSLIND. Based on this index, I would not expect a very rosy forecast for next year, or as Kansas Policy Institute has pointed out, for the remainder of the current fiscal year.

    Kansas economic indicatorsKansas economic indicators, current in blue, and leading in red.

  • Kansas fiscal policy is stifling the state’s economy

    Dave Trabert of Kansas Policy Institute explains that Kansas economic policies are leading to the growth of government at the expense of private sector economic activity. Separately, KPI released figures showing that it will be very difficult for the state to meet the revenue projections made for the current fiscal year, which ends on June 30, 2011. Kansas tax collections in March were below projections, meaning even more trouble balancing the current year budget.

    State Fiscal Policy is Stifling the Kansas Economy

    By Dave Trabert, Kansas Policy Institute.

    Kansas’ fiscal policy has stifled the state’s economy for more than a decade and the effects are now being severely felt. Policy debates are often thought of in terms of party identification but the dividing line in Kansas is about the size and role of government; specifically, limited government versus large, expanding government. Most major policy debates really come down to whether government or taxpayer interests take precedent.

    For example, last year’s 19 percent sales tax increase was designed to allow government spending to increase by more than $200 million. Efforts to instead have government operate more efficiently were rebuffed by the demand for higher revenues, even though both academic studies of the proposed sales tax increase concluded it would cost thousands of jobs. The February employment report from the Kansas Department of Labor confirms those predictions.

    Kansas employmentKansas employment

    Kansas continues to lose private sector jobs, while government jobs increase. The adjacent table shows a loss of 12,100 private sector jobs over the last year; you have to go back to 1997 to find fewer jobs in February. To fairly compare February employment to the July implementation of the sales tax, we have to use seasonally adjusted data from the U.S. Department of Labor. On that basis, there are 23,200 fewer private sector jobs since the sales tax increase.

    There’s been talk of repealing the sales tax but opponents say it would make it harder to balance the state budget. That’s true, but it can be done by having government operate more efficiently, eliminating programs no longer deemed effective, and treating government employees the same as all other taxpayers. Others oppose repealing the sales tax because they’d rather retain it and use the revenue to begin reducing income tax rates. The March to Economic Growth Act (MEGA) would restrict the growth in state revenue and ease the tax burden but opponents are concerned about the impact on government. Never mind that Kansas has one of the highest state and local tax burdens in the country (number 19 according to the Tax Foundation and getting worse) and that jobs and population are migrating to states with lower tax burdens.

    Last year’s smoking ban was another fine example of putting government interests first, with state-owned casinos getting an exemption. Opponents of an effort to remove that exemption say it would cost state-owned casinos millions of dollars in lost revenue and reduce state tax revenues. Bar owners said the same thing last year but their concerns were dismissed.

    And then there’s the Kansas Public Employees Retirement System (KPERS). The debate over resolving a KPERS deficit of at least $9.3 billion is perhaps the most egregious example of fiscal policy favoring government growth. KPERS is one of the worst funded plans in the country and provides benefits many times greater than received by most private sector workers. Fully funding it will have catastrophic impact on taxpayers and the economy, but even minor benefit reductions are vehemently opposed. Even a proposal to reduce benefits for employees not yet hired can’t get off the ground.

    Continuing to strip taxpayers of their economic freedom so that we can sustain and grow government will eventually cause the state’s economy to implode, as governments in California, Illinois and many nations are currently experiencing. This isn’t theory, it’s history — and we should avoid repeating it.

  • Kansas OpenGov: Here’s the Kansas data

    KansasOpenGov.org provides an easy-to-access repository of data about Kansas state and local governments, giving citizens the data they need to hold officials accountable.

    KansasOpenGov.org is a project of the Kansas Policy Institute. Recently I spoke to KPI President Dave Trabert and received a demonstration of the website and some ways it can be used.

    On its opening page, KansasOpenGov.org displays a map of Kansas, showing the county boundaries. As you roll the pointer over each county, data about taxes and population appears. Clicking on a county displays a table of tax and population data for the last 12 years.

    Many subject areas of KansasOpenGov.org allow you to search the database in your own way, but also provide pre-defined reports and charts that can be accessed with one click. For example, under “Pay and Benefits” there are two such reports, showing state employees earning $100,000 or more, and another showing overtime pay.

    The overtime pay report holds some interesting numbers, as shown in the accompanying video walkthrough. Some employees are earning a lot in overtime. Trabert said: “When government says we couldn’t possibly spend any less — as we heard from the governor and others in the last session in order to justify a tax increase — when you have people who sit behind desks such as planners and program consultants earning over $30,000 in overtime — it begs the question: How close are you looking?”

    High overtime expenses may mean that agencies should look to hire additional employees rather than paying expensive overtime. Some jobs, such as highway patrol officers, are stressful, and high overtime earnings may mean employees are working long hours. This may be unfair to them as well as unproductive.

    Another subject area of KansasOpenGov.org is school district revenue and spending. This data is supplied by the Kansas State Department of Education, which in turn gets data from school districts. The “District Comparison Tool” displays two charts, side-by-side, and visitors can select different districts to be shown in each chart.

    KansasOpenGov.org has added some additional data, such as an indication for each school district as to whether it has joined Schools for Fair Funding, the organization that is suing the state for more funding. This allows users to compare these schools with all schools. Interestingly, the SFFF schools receive substantially more state and federal funding (on a per-pupil basis) than the statewide average for all Kansas schools. The SFFF schools receive less local funding, however. But overall, they received more funding than the average school district.

    Other insight that can be found at KansasOpenGov.org is the fact that schools increased their contingency fund balances last year at the same time they laid off teachers and other staff. Again, this lead Trabert to question the claims of spenders, this time the schools: “What we want to show is that when people say we can’t spend any less, you’re hurting the kids, and they’re asking for a tax increase: taxpayers have the right to know the facts. … The state has the right to justify the spending, but people don’t get a chance to ask for the justification if they don’t know the facts.”

    Growth in Kansas property taxesGrowth in Kansas property taxes. Click for a larger view.

    The section on property taxes lets visitors create charts for each county showing the growth in taxes, inflation, and population. For most counties, and for the state as a whole, taxes increase much faster than inflation or population.

    Some of the data the system makes available requires additional explanation. For example, looking at the state’s checkbook shows a check written by the treasurer for $269,940,000.00 with the notation “DEFEASED DEBT – PRINCIPAL PAYMENTS.” This language — provided to KansasOpenGov.org by the state — certainly needs explanation.

    In other cases, some of the data the state supplies may be misleading at first glance. For example, a look at employees of the Legislature and their pay shows one member of the Kansas House of Representatives being paid over $106,000 in one year — way more than legislators actually earn. But this person also has another state job, and the two pay sources are combined in the data the state supplies.

    KansasOpenGov.org lets users download most data to spreadsheet programs such as Microsoft Excel, which means that the data can be further analyzed and presented.

  • KPERS problems must be confronted

    This week the Kansas Legislature may work on the problems facing the Kansas Public Employee Retirement System, or KPERS. Past legislatures have failed to enact reforms necessary to put this system on a sound financial footing, and the legislature has shown itself incapable of managing a system where it’s easy to pass on the problem to future generations. Now Kansas faces an unfunded liability of some $9.3 billion in KPERS. The most important thing the state can do is to stop enrolling new employees in this failing system.

    When confronted with the realities of the finances of KPERS, the response of state government employee representatives is first, attack the messenger. This is taking place now in response to a report released by the Kansas Policy Institute (A Comprehensive Reform of Kansas Public Employees Retirement System). It also happened in 2009 when Art Hall and Barry Poulson released their research in The Funding Crisis in the Kansas Public Employee Retirement System.

    The second response of state government employee representatives is to attack the only solution (short of massive tax increases) to providing for workers’ retirements: the defined-contribution plan. These plans, often called 401(k)-style plans, allow workers to contribute into a special type of tax-advantaged retirement account. Usually employers, in this case the State of Kansas, make additional contributions on employees’ behalf. Employees generally have a variety of investments to choose from. Employees also own their retirement accounts and their assets. The value of the account — and therefore the benefits available to retirees — depends on the performance of the investments.

    KPERS is a defined-benefit plan, sometimes called a traditional pension plan. When employees retire, they are paid a benefit based on their final average salary, number of years of service, and a multiplier. KPERS funding relies on employee contributions, employer contributions (these are the state’s taxpayers), and investment returns.

    The main problem is that the legislature has not provided enough funding to KPERS to keep it in balance. That’s easy to do, as retirement systems like KPERS operate on time horizons of decades, and it’s easy to say let’s deal with the problem next year. It’s also easy for legislators to promise and write into law a higher level of benefits than they’re willing to fund. Problems with lack of funding may not show up until long after the legislators who voted for them are out of office. With defined-contribution plans this isn’t possible. Each party — worker and employer — funds the plan each pay period, and that is the extent of the obligation of each party.

    Misinformation spread

    In its message to its followers, Kansas National Education Association (KNEA, the teachers union) wrote this about the problem with defined-contribution plans: “First, they claim that a DC plan gives the employee control over their own retirement. And if you have lots to invest and have the time and knowledge to do so effectively, that might be true. Of course, even if you do, you can end up like the folks who found Enron to be a great investment or trusted Mr. Madoff. The fact is most of us are not prepared to do our own analysis and investment.”

    There’s quite a bit of misinformation here. But before that, a huge irony is that this information is aimed at Kansas schoolteachers, and their union assumes they are not intelligent enough to plan for their own retirement.

    In fact, planning for retirement is quite easy and simple. All one needs to do is select low-cost index stock and bond mutual funds, of which there are many. These funds, over the long time horizon appropriate for retirement investing, beat the performance of all managed funds, meaning funds managed by professionals who attempt to analyze markets and earn greater than average returns through an active trading strategy. This is not disputed by anyone except by those who sell actively-managed mutual funds.

    “The evidence is clear. Low-cost index funds regularly outperform two-thirds of actively managed funds, and the one-third of actively managed funds that outperform changes from period to period. Even the very few professional investors who have beaten the market over long periods of time — Berkshire Hathaway’s Warren Buffett and Yale University’s David Swensen, for instance — are quick to advise that investors are likely to be much better off with simple low-cost index funds than with expensive actively managed funds.” (Burton G. Malkiel, ‘Buy and Hold’ Is Still a Winner. Also, see the author’s book The random walk guide to investing: ten rules for financial success.)

    Generally, most investors would select just one or two funds in which to place their contributions. Over time, investors may want to change the balance or characteristics of the funds they invest in. This again is easy to do. In fact, large mutual fund companies like Vanguard have index funds that automatically shift the balance between stocks and bonds as investors move along towards retirement.

    The idea that the teachers union believes that professionals like schoolteachers are not capable of becoming informed and making these decisions is laughable if it weren’t the actual belief of the union. Suggestion: An actually useful and productive role for the teachers unions would be to help their members learn to invest for their retirement.

    The problem cited about Enron and Madoff is that some people placed all or nearly all their investments with these two firms. That’s a bad strategy for anyone to follow with their retirement investments. Using index funds will not expose investors to the risk of losing all their money.

    The claim by the KNEA that “lots to invest” is required is false. The companies that manage defined-contribution retirement plans accept new employees into the plan no matter how little they have to invest, and they accept their periodic contributions each pay period no matter how small. Scale — the amount available to invest — is not an issue, contrary to the assertions of the teachers union.

    One claim made by KNEA is true: defined contribution plans give workers control over their retirement savings. This is a benefit. If a worker has a low tolerance for risk, they can keep their contributions in cash (actually treasury bonds would be the choice for these people). Others who wish to take an active role in the retirement investing can do so, as most plans offer funds that have targeted goals such as real estate, growth stocks, short-term bonds, long-term bonds, etc.

    But in KPERS, all members are invested in the mix of investments that the KPERS trustees decide on. (When Jane Carter of Kansas Organization of State Employees asks “Do you really want to take your retirement security and gamble it on the stock market?” she may not be aware that KPERS is invested in the stock market, and those returns are essential to funding KPERS benefits.) The investments that the trustees choose may not be suitable for each individual member. But KPERS members have no choice.

    By the way, the KPERS investment fund has proven irresistible to politicians seeking to invest in Kansas for various reasons. In the 1980s a series of bad investments were made in Kansas companies. As reported in the Wichita Eagle on October 16, 1989: “For many Kansas legislators, the lure of using KPERS money for economic development was tempting. So KPERS, under considerable legislative pressure, agreed to target nearly 10 percent of its fund for business expansions in Kansas.” Many of these investments lost money, and lawsuits went on for years.

    The point is that the worker is in control, not the KPERS trustees or the legislature. That’s important, as the legislature, over the years, has not made sufficient contributions to KPERS. They keep pushing the decision down the road to future legislatures, and the burden on future taxpayers who will need to make the necessary contributions. But in a defined benefit plan, employees, through their employers, make contributions each pay period. If for some reason the employer fails to make the contribution, it’s easy to notice it before years go by.

    New members needed to prop up existing

    Reading the material put out by KPERS defined-benefit supporters, it becomes clear that KPERS depends on the contributions of new members to pay for the benefits of those already in the system. Here’s a claim made by KNEA, the teachers union: “If all new employees came in under a defined contribution or 401(k) plan, their investments would be essentially personal investments and not used to contribute to benefit payments to current or future defined benefit members. This means that each person who retires will be replaced by someone who is not paying into the defined benefit system.” (emphasis added)

    The KNEA has also written to its members: “The state would have the obligation to continue funding the defined benefit (DB) plan since it depends on new employees contributing to fund at least a portion of the benefits to retirees. (emphasis added)

    This claim was echoed in testimony given by Coalition for Keeping the Kansas Promise, which states: “In fact, the creation of a defined contribution plan for KPERS, which will remove revenues used to reduce the unfunded actuarial liability, will only accelerate the insolvency of the KPERS fund for current KPERS members and retirees from FY 2033 to an uncertain, though more immediate, date in the future, and place the entire KPERS funding obligation upon Kansas taxpayers.”

    There could be no clearer admission that the KPERS contributions of young workers are used to fund the benefits of retirees. Instead of the new members’ contributions being invested and growing to provide for their own retirement, their contributions are needed to pay for current retirees. This is a system that guarantees being perpetually under-funded.

    Who is the employer?

    The Kansas Policy Institute report states: “Employers in the state/school plan currently contribute 9.37 percent of payroll. To fully fund that part of the plan at the market value of assets employers would have to contribute 15.26 percent of payroll. Employer contributions into the state/school plan would have to increase from $393 million to $640 million annually, a 63 percent increase.”

    Now when most people read this and other information about KPERS they probably don’t associate “employer contributions” with what this term means. Since KPERS covers government employees, the employer is the state’s taxpayers.

    That’s right. It is the taxpayers who will be called upon to correct the unfunded KPERS liability. The KPI report is accurate but understates the political reality when it concludes: “Kansas legislators are not likely to find an additional $247 million in the current budget to fully fund the KPERS pension plan; and they are even less likely to find the money to fully fund the plan in future years as unfunded liabilities accumulate, especially if the plan fails to generate the projected 8 percent rate of return on assets.”

    Most Kansans realize that KPERS is part of the cost of having state employees. Citizens pay taxes so that these employees can be paid, and KPERS is part of their package of pay. The problem is that citizens expect that the cost of paying employees be paid each year. But now we learn that the legislature has not been doing this. The legislature has not been paying all that is required into the KPERS system. Essentially, taxpayers will be asked to pay now for payments not made in years past for work that was performed years ago.

    Investors or combatants

    The current system of retirement for state employees creates a situation where there is conflict. We see it right now, where state employees and their lobbying groups insist that the state make good on its promise to its workers. The pushback comes from those who realize that taxpayers are tired of ever-increasing spending. This is especially true when taxpayers are being asked to make up for the deficits of legislatures past. So there’s conflict. One class is trying to extract payment from another. It isn’t pretty, and it’s not productive. It’s the political system at its worst.

    Advocates for state employees say there’s nothing wrong with KPERS that can’t be fixed by funding it properly. In other words, more taxes and more spending: more conflict. We need to find a way out of this trap, and enrolling new state employees in defined-contribution retirement plans is the way.

    The benefit of defined-contribution plans is that people, including state employees, become investors. They own something. They have a rooting interest in the success of the economies of Kansas, America, and the world.

    Kansas state employees have a choice to make. Do they want to become investors in America and own their retirement funds, or do they want to continue to rely on the political system for their retirement?

  • Kansas loses chance to improve tax climate

    Legislation that would have improved the tax climate in Kansas over time appears dead this year. It’s something that we need in Kansas, but Kansas Senate leadership is not in favor of the bill.

    The bill, named the March to Economic Growth, would have used increases in Kansas revenue to reduce state personal and corporate income tax rates. This is something that is needed, as new rankings published by the Tax Foundation indicate that the business tax climate in Kansas is poor. Kansas ranks 35th among the 50 states, just 15 spots from the bottom. In last year’s ranking, Kansas placed 32nd, so our state is slipping relative to other states.

    The economic development strategy of Kansas and Wichita has been to offer tax abatements as an inventive to lure or retain industry. The study authors note the problem with this: “State lawmakers are always mindful of their states’ business tax climates but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform. … Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate. A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state’s competitiveness.”

    New Kansas Governor Sam Brownback has an economic development plan that includes parts of Dr. Art Hall’s “embracing dynamism” strategy. This strategy recognizes the futility of bureaucrats attempting to dish out economic development incentives, and recommends a strategy of creating an environment favorable to all businesses of all sizes. In particular, research has shown that it is new, young firms that are the dynamic driver of growth and innovation, but economic development policies are slanted towards old, established firms.

    While it is refreshing to see the governor’s plan recognize the need for an environment that promotes dynamism, the plan still contains mechanisms for targeted economic development, including incentives to retain companies that threaten to leave Kansas. As for Wichita, city council members and bureaucrats yearn for “more tools in the toolbox.” The governor’s message hasn’t quite reached them.

    Are taxes and tax policy important? After a review of the literature, the Tax Foundation report concludes: “… the general consensus of the literature has progressed to the view that taxes are a substantial factor in the decision-making process for businesses.” But there are some authors who disagree.

    The state business climate index considers these factors: corporate taxes, individual income taxes, sales tax, unemployment tax, and property taxes. Kansas performs best on unemployment taxes, ranking 7th among the states. Our worst raking is 41st in property taxes. In sales tax, Kansas ranks 32nd, and this does take into account the statewide sales tax increase of one cent per dollar that started July 1.

    The report recognizes that taxes are only one of many factors that companies use when deciding where to locate facilities. Kansas’ low ranking means we can make large improvements in this area. If we don’t, we are likely to have to keep up our ad hoc approach to economic development, were we craft special deals under the conceited belief that we know which deals to make.

    The full report is available at the Tax Foundation by clicking on 2011 State Business Tax Climate Index. An introductory article is at Background paper: 2011 State Business Tax Climate Index (Eighth Edition).