There was an interesting article recently posted on CPA Success by Bill Sheridan regarding underfunding issues with public pensions and other retirement benefits. The article described a recent study by the Pew Center on the States that found a $1 trillion gap between what states had promised their employees in retirement benefits and what those states are actually able to pay.
According to the report, as of 2008, states had set aside only $2.35 trillion for retirement benefits valued at $3.35 trillion. Thus, states had funded only approximately 70% of the retirement benefits promised to their public employees. In particular, the report found that underfunding issues had rapidly increased over the past decade. In 2000, just over half the states had fully funded pension systems. By 2008, only four states – Florida, New York, Washington, and Wisconsin – had fully funded pension systems.
A large part, but not all, of this change is because, in 2000, the stock market had just had a wonderful decade of high returns, whereas 2000-2008 contained two dramatic downturns in the stock market. As of 2008, Illinois and Kansas had the worst funding ratios and were able to pay less than 60% of the retirement benefits promised to public employees. Given the recent market downturn and the “Great Recession,” these figures have likely worsened.
The underfunding issues in Illinois have long been recognized in many forums nationally and in Illinois. However, the severe problems in Kansas have stayed largely under the radar screen. Kansas has certainly created the image of being a fiscally prudent and conservative “red state,” but the problems with public pension funding in Kansas are very real.
In Kansas, the majority of the problems originate with the Kansas Public Employees Retirement System (“KPERS”). KPERS had a record unfunded accrued liability – the amount owed to the pension plan to pay for benefits previously earned by employees – of $8.3 billion in 2009. According to the Flint Hills Center for Public Policy, the Kansas Legislature has only allocated KPERS an average of 71% of the actuarially required contributions. The insufficient contributions, combined with other factors, have increased the unfunded accrued liability to nearly $10 billion, which is roughly equivalent to each Kansas resident owing $3,544.
There was also an increase in pension costs as a result of a benefit enhancement package passed by the Kansas Legislature in 1993. The package allows employers to pay the unfunded accrued liability over a forty-year period while capping employers’ contribution rate increases between 0.2% and 0.6%. While the caps seemed to have made sense during 1993 because they minimized the pensions’ potential effect on the employers’ budgets, they have materially worsened KPERS’ financial viability.
Part of this is due to the two stock market collapses that have occurred since 2000. As the plan assets lost value and suffered huge losses in the stock market, the employers’ contributions were not increased to offset these losses. As a result, KPERS’ unfunded accrued liability steadily increased and the pension plan now has a funding ratio of approximately 50%. Eighty percent funding is often viewed as acceptable, even though it is not full funding. Kansas is way below acceptable levels of funding by any standard.
With these staggering figures in mind, it is critical for union officials, trustees of public pension plans, and city and state officials to take action to correct the public pension underfunding issue. Funding problems require an infusion of money, usually raised by tax increases or pension obligation bonds. Those measures are politically unpopular, especially during a recession, but are necessary.
If the governmental unit is unwilling to work with the trustees or employees to guarantee the financial viability of the pension plan, pension trustees and labor groups may need to consider litigation. Otherwise, if no action is taken to solve these problems, the issues will only worsen and will result in even tougher decisions to be made in the future.
Fortunately, some cities have recently recognized the severity of their underfunding issues and have taken measures to fully fund their public pensions. In St. Louis, Missouri, the trustees of the Firemen’s Retirement System retained Danna McKitrick, P.C. to sue the City of St. Louis to require it to properly fund the pension system. In 2007, the Supreme Court of Missouri ruled in favor of the trustees, resulting in a $49.4 million payment by the City of St. Louis.
In 2009, the City of Springfield, Missouri, a politically and fiscally conservative community, passed a 0.75% sales tax during the Great Recession to help correct underfunding issues with its police and fire pension fund without the need for litigation. We assisted Springfield in this by working with their task force while representing the IAFF Local 152 and the Springfield Police Officer Association.
The trustees of the Kansas Public Employees Retirement System must begin to deal with underfunding issues before the issues worsen. Whether it be through negotiations or litigation, those involved must find solutions to the current underfunding issues to ensure that public employees receive the benefits promised to them. Once a plan gets below 50%, it is on a “slippery slope” and recovery to financial stability becomes much more difficult. Kansas is already in trouble and immediate intervention is needed.
Comments are closed.
