For the second straight year, Democratic Kansas Governor Laura Kelly has proposed a KPERS reamortization plan for the Kansas Public Employees Retirement System.
“Re-amortization — basically refinancing — will recalculate the annual payments required by the state, and greatly reduce the annual cost of KPERS while staying on track to fully fund KPERS. It’s a sound, fiscally prudent tool often used in other states,” the governor’s office said in a release in early January.
KPERS is currently billions in the red and Kelly’s plan to reamortize — an analogy would be refinancing a mortgage — would cost taxpayers $4.4 billion in additional pension funding by extending the ‘mortgage’ another 10 years.
The current 40-year amortization was supposed to close out in 2033; Kelly’s plan would extend that to 2043.
According to a release from KPERS itself, reamortization would allow the state to put off paying about $963 million over the next five years in employer contributions, including $187 million in 2021. These short-term savings are projected to cost the state $4.4 billion over time. Kelly wants to use those ‘savings’ so she can spend it on other programs.
The KPERS release also says Kelly’s plan will make KPERS more vulnerable to adverse market conditions for more than a decade. The KPERS plan currently has a 66% funded ratio, considered “cautionary” and the release says Kelly’s plan would not reach the 80% funding ratio considered safe until 2036 — three years after the current payment schedule would have the legacy plan 100% funded.
According to Leonard Gilroy, Vice President of Government Reform at the Reason Foundation, Kelly’s KPERS reamortization plan is about trying to free up money to use elsewhere.
“What she’s doing is trying to basically free up money in the budget, so then [she] can play with that somewhere else,” Gilroy said.
Moreover, Gilory said, the assumed rate of return on the legacy KPERS plan is approximately 7 percent, so an additional 7% is added every year to the unfunded liabilities of the plan.
“You’re trying to chase your pension promises going up 7% a year,” he said. “The only way to get after that, then move that down is to pay more. And you have to beat it and you need to be putting more money, much more in, not less.”
According to Gilroy, what states — not just Kansas — who find themselves in pension trouble are doing is to move money into riskier investments to try to stabilize their plans. The problem is that between significant stock market downturns in 2001 and 2008 and decades of lower, delayed and missing employer contributions, Kansas is facing a massive shortfall.
Gilroy, however, said the solution is not stretching the payments out but, rather — much like many personal financial advisors would say — paying it down faster.
“We’re saying ‘don’t spread out your debt,’ pay it faster; put more in,” he said.
Michael Austin, Director of the Center for Entrepreneurial Government at Kansas Policy Institute, which owns the Sentinel, agreed in testimony to the legislature.
“Governor Kelly’s plan to reamortize KPERS is a gimmick to increase record spending elsewhere,” he said. “This idea was rightly scuttled by the legislature last year and is little more than refinancing a credit card to spend more money someplace else – you’d still owe the money, you’re just making minimum payments for a longer time.”
KPERS does stress that reamortization would not affect current retiree benefits, but would cost more in the long run.
This is far from the first time such a plan has been considered, and not the only administration to consider it.
The legislature shot down a similar plan that would have added more than $7 billion to the liabilities last year, and while governor Kelly claimed it was merely politically motivated, a Wichita Eagle story said her opponents disagreed.
In a February 2019 story, Rep. Kristey Williams, R-Augusta, told the Eagle she would have also opposed the KPERS reamortization plan if Republican Gov. Sam Brownback had proposed it.
“It’s very simple,” Williams told the Eagle. “This was considered two years ago, four years ago when we trying to make ends meet. This is something that Republicans considered. But at the end of the day, you cannot trade $146 million annually for a few years for $7 billion,” Williams said.