Lawmakers fear Kansas will not make good on its promise to pay $100 million to its pension system that it withheld earlier this year on the condition the amount is paid with interest by 2018.
Members of the Joint Committee on Pensions and Investments said Monday the Legislature will likely further delay making the payment as the state faces budget difficulties that lawmakers must confront next year.
Lawmakers this spring voted to allow Gov. Sam Brownback to delay the payment as a way to help balance the budget. Now, the payment may once again be put off in an effort to ease budget pressures if legislators’ intuition proves correct.
“I’m not optimistic it will be paid back within the coming year or by that time frame,” said Rep. Steven Johnson, R-Assaria. “It must be paid back at some point in time because the debt is real even if the immediate desire to pay it is not.”
The delayed payment represents a quarter of the annual payments the state makes to the pension system, known as KPERS. Under current law, the payment must be made with 8 percent interest by June 30, 2018 — though that can be changed simply through the statute.
“Don’t get me wrong, I would like to pay it. I just think this next Legislature’s going to be put in a position where we can’t unless we change our revenue picture,” said Rep. Ed Trimmer, D-Winfield.
Sen. Laura Kelly, D-Topeka, predicted the Legislature will further delay the payment. The state has a whole “laundry list” of services that need funding to be restored, she said, and KPERS is likely low on the priority list.
She indicated any changes to the state’s tax law likely won’t yield new revenue until after the 2018 repayment deadline.
“It’s so easy to defer. We just don’t pay it,” Kelly said.
Sen. Jeff King, R-Independence, noted the employer contribution rate for KPERS’ state/school group is 10.81 percent for the current fiscal year, while the actuarially-required contribution stands at a little more than 13 percent. He asked KPERS director Alan Conroy what the difference represents in cash. The answer was approximately $150 million — yet another challenge for lawmakers if they wish to fully fund the employer contribution.
“I know the Legislature is facing some challenging budget issues going forward, which sounds like the exact same thing we have said from this podium for at least the last five years,” King said.
A short time later, King, who is not running for re-election, observed: “This kind of news makes me feel a lot better about what I’ll be doing next year.”
According to documents from KPERS, the delayed $100 million contribution didn’t affect the 2015 system valuation or projections. But contribution rates in future years will be higher if contributions are not repaid as planned, KPERS said.
The skepticism that the Legislature will fulfill its payment obligation comes as KPERS’ investments have fallen below historical targets. The system assumes investment returns of 8 percent, but Conroy indicated yields are likely much lower.
So far in 2016, investment returns are likely in the 3-4 percent range, Conroy said. Kansas issued a $1 billion pension bond in August 2015, and figures on its first year of performance will be available within the next week, he said.
Conroy has previously told The Topeka Capital-Journal that the bond, which has an interest rate just under 5 percent, probably came out even or only slightly ahead after the first year of its 30-year life.
While 8 percent is a commonly used target for pension systems, some have lowered expectations. As part of a regular review process, the KPERS board will begin a study of its investment target this fall.
“While the investment returns are below 8 percent, they are substantially higher than market averages. Our board is doing a great job in this investment climate. It illustrates the dangers of having an 8 percent investment return assumption,” King said.
This article is originally published on the Topeka Capital-Journal’s website, here.