The Kansas pension fund dug about $716 million deeper into the red during 2010, bottoming out at $21.9 billion, a Washington think tank said Monday.
But the state is not alone.
Nationally, the gap between what state pension funds have saved to pay future workers’ benefits and what they have promised to pay increased by $12 billion, to a total $1.38 trillion during 2010, said David Draine, a researcher at the Pew Center on the States.
The latest survey is the third Pew researchers have done since 2009, and the gaps have increased annually.
“While the economy and state revenues are improving, states are still struggling to manage the bill coming due for promised benefits,” Draine said Monday in a webinar about the findings.
More states – 34 in 2010 versus 31 in 2009 and 22 in 2008 – fell below the 80 percent-funded threshold, which pension specialists say is healthy for state plans, Pew reported.
Kansas fell two percentage points to 64 percent funded. Pew analyzes formal annual financial reports and actuarial valuations to make the calculations, and 2010 is the most recent year for which those are available.
The numbers will probably get worse for at least two more years, predicts Ron Snell, a pension policy specialist for the National Conference of State Legislatures in Denver.
“That’s because of smoothing,” Snell said.
Smoothing is an accounting technique used by the Kansas Public Employees Retirement System and other large pensions to average extreme swings in investment returns over five years to help plot long-term changes in their investments.
KPERS – which manages $14 billion in retirement savings for 279,000 working and retired teachers and government employees — lost billions during the 2008 Wall Street meltdown and, like many plans, is still absorbing the last of the smoothed-in losses, Snell said.
“Those losses probably will start easing up in fiscal 2012 or 2013,” Snell said. Kansas’ and KPERS’ fiscal year begins July 1.
KPERS officially pegs the funding shortfall at $8.3 billion, which is far smaller than Pew calculated Monday, or the about $20 billion that economists Joshua Rauh and Robert Novy-Marx of Chicago predicted in 2009.
For planning purposes, KPERS presumes its investments will grow about 8 percent annually over the several decades it will be paying current members. Pew researchers and the Chicago economists ran the calculations with lower returns, to reflect losses in 2008.
Workers and teachers who join KPERS beginning in 2015 will be offered guaranteed-interest retirement savings plans, instead of traditional pensions. That will limit taxpayers’ open-ended pledge to those new workers, but a funding gap will remain for members now, or those hired before Jan. 1, 2015.
KPERS’ actuaries are reviewing those year-old $8.3 billion projections and may have fresh projections in a month or so, said Kirsten Basso, the system’s chief communications officer. Basso said she had yet to see the latest Pew report.
Mitch Holmes (R-St. John) chairs the Kansas House Pensions and Benefits Committee. He said he thought Pew’s estimate overstates KPERS’ actual funding gap, although KPERS’ $8.3 billion calculation seems to understate the divide, he said.
“That 8 percent assumption seems a little high,” Holmes said.
Holmes said he thinks KPERS’ long-term returns have slipped below 8 percent, but not that far.
“I don’t know what the number is exactly, but I’ve talked with a lot of people who plan retirements for a living, and I think something near 7.5 percent seems about right,” he said.
Lowering KPERS’ assumed investment returns even by half a percentage point would increase the plan’s potential cost to taxpayers, because the system still needs $8.3 billion or more to reach full funding, according to system actuaries. How much more that might cost wasn’t immediately calculable Monday.
Sheila Weinberg, founder and chief executive of the Institute for Truth In Accounting, calculated in a separate report issued Wednesday that Kansas’ estimated pension obligations in 2010 already were larger than any one of the state’s other debts.
Weinberg and the Institute, a nonpartisan advocate of clearer government accounting based in suburban Chicago, calculates Kansas’ owes retirees at least $6 billion in retirement benefits that don’t show up on state balance sheets, compared to $4.3 billion in similarly unrecognized debt for highway construction, state building projects and other costs that have been shifted to future taxpayers.
Weinberg said she used official state financial numbers to make her calculations, without adjusting for market losses or potentially reduced returns, as Pew or other researchers have done.
“The official figures are bad enough to show that costs need to be paid when they occur,” Weinberg said.
Kansas isn’t the only state in this kind of a jam. Weinberg estimates that more than $900 billion in future retirement benefits nationally are promised to state and local pension plan members that won’t hit state budgets until years from now, when the pensions are due.
“States pay only what is due during the current budget year, which does not take in account true long-term obligations on their balance sheets,” Weinberg said. “Hundreds of billions of dollars of retirement liabilities are not reported, which pushes these costs onto future taxpayers.”
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