A recent Wichita Eagle editorial by Phillip Brownlee misses understates the magnitude of the problem with Kansas Public Employee Retirement System, or KPERS, and fails to recognize problems with possible solutions. ($8.3 billion question, November 4, 2011 Wichita Eagle)
The first problem is stating the magnitude of the problem. Brownlee, like most sources, states the funding shortfall at $8.3 billion. Using that number is nothing short of fraudulent. KPERS acknowledges that there are about $600 million in market losses that aren’t included in the $8.3 billion figure because government accounting rules don’t require such reporting. Plus, this valuation relies on assumed rates of return that are higher than the private sector uses. Adjusting for these factors, and using a realistic assumed rate of return of six percent, Kansas Policy Institute says the shortfall would be $14.1 billion.
More shocking is an evaluation of state pension funds conducted by the American Enterprise Institute which uses market valuation methods. This evaluation puts the shortfall for Kansas at $21.8 billion.
Either way, the magnitude of the problem is far larger than Brownlee acknowledges.
Brownlee also writes that moving to a defined-contribution plan isn’t the solution. He says that “future contributions would be diverted to the new plan,” but these contributions are needed to prop up the current system. The teachers union and organizations that advocate for state employees have made similar claims, with the KNEA writing: “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)
These admissions that the contributions of young workers are used to fund the benefits of retirees is admission of a Ponzi scheme. Instead of new members’ contributions being invested 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. It must be stopped.
Very troubling is Brownlee’s discussion of a proposal to borrow $5 billion to prop up KPERS. The only objection Brownlee finds is that it could be risky if the stock market falls. Yes, part of the problem with KPERS is that the stock market is down and there have been losses in recent years. Although we can’t predict when the market will fall and by how much, we know that there will be ups and downs over long periods of time, and that’s the domain of pension funds — long periods of time.
That the state might even consider borrowing $5 billion to fund KPERS is an admission that the state has been running deficits for some years, despite a requirement for a balanced budget. We are left with the realization that the legislature has committed itself to obligations that it chose not to fund. $5 billion is nearly one year’s general fund spending. It’s a lot of money in Kansas, and even this much would not close the gap in KPERS.
This deficit has not appeared in any budget. The legislature and governors have said we’ve balanced the budget. But when the liabilities the state has incurred, but not paid for, are added, we realize that we’ve not been told the truth. Mr. Brownlee’s editorial does nothing to advance this truth to Kansans.
The first thing Kansas must do is realize that the state has not shown responsibility in running a defined-benefit pension plan, and it must stop admitting new employees.