Standard often cited in Kansas pension debates questioned
Topeka Kansas officials say the state will know its underfunded pension system is back on solid financial ground when its revenues and investment earnings are expected to cover 80 percent of the benefits promised retirees over the next two decades.
Their rule of thumb has popped up repeatedly as Republican Gov. Sam Brownback and GOP legislators have touted their efforts to improve the public pension system's health. The Kansas pension system was only 62 percent funded at the end of last year although that is expected to rise.
The 80 percent benchmark has been cited in federal reports, but it's hard to pin down its origin, and its value is questioned by a national financial rating agency and a group for state pension system administrators. The American Academy of Actuaries, representing people who assess financial risk for a living, even called it a "myth" in the headline of a 2012 report.
Such experts say a pension system's financial footing depends on multiple factors. The actuaries' academy said in its 2012 report that a pension plan's health should not be reduced to a single benchmark. There are also concerns such a marker encourages public officials to slack off on pensions funding once it's reached.
Bill Hallmark, a Portland, Oregon actuary and chairman of the academy's subcommittee on public pension plans, said one danger is that by targeting 80 percent funding, state and local governments will lose sight of the more laudable goal of full funding of pensions.
"Also, just measuring the health of the plan based on funding status doesn't necessarily drive good policy."
Officials of all political philosophies and public employee groups acknowledge that the state shorted contributions to the Kansas Public Employees Retirement System over decades, creating too big a gap to close quickly. The funding percentage calculated by KPERS bottomed out in recent years at 56 percent, which Brownback called in a recent interview the "bankruptcy, no-go zone."
A 2012 law increased state contributions to public pensions — and revised benefits for new employees to bring anticipated pension system revenues and obligations into line by 2033.
Also, Kansas last month issued $1 billion in pension bonds, a move expected to boost the system's funding percentage — in theory putting it on a better footing more quickly. Some financial analysts said the state is taking a financial risk, but Brownback and his allies are confident KPERS will earn more from investing the funds raised though the bonds than it will pay to retire the debt.
KPERS Executive Director Alan Conroy said achieving 80 percent funding represents clearing a major hurdle on the way to "the brass ring" of full, sustainable pensions funding. Senate pensions committee chairman Jeff King said hitting the 80 percent mark is "a good long-term financial goal."
Reports from the U.S. Government Accountability Office in 2007 and 2008 reinforce such views. In a 2007 report, the GAO said 80 percent is "within the range" that unnamed experts, advocates and union officials view as "healthy."
"It's a basic tenet of financial logic that more funding for pensions is better than less funding for pensions," said King, an Independence Republican.
But the National Association of State Retirement Administrators doesn't have a specific funding threshold for determining when a pension plan is healthy. It argues that a critical issue is whether meeting pension obligations stresses a state or local government.
And Moody's Investors Services, the financial ratings agency, prefers to compare states' pension liabilities with their annual revenues. Moody's officials note they assess credit risks — a state's ability to repay bonds, for example.
The agency's last comparison of states, in November 2014 for their 2013 budget years, calculated a median net pension liability equal to 60 percent of their revenues. The figure for Kansas was nearly 141 percent, meaning that its liabilities were well above annual revenue. That placed Kansas eighth among states, with Illinois having the greatest imbalance of liabilities to revenues at 268 percent.
"The funded ratio has its purpose," Tim Blake, a Moody's managing director, said in an interview. "It really doesn't do the job for us when we're trying to assess the ability to pay these obligations."