Speaker of the House, Ray Merrick, shared his Marine quote with me when I started my first term in the House in 2011. "It is our responsibility to be successful under conditions as we find them-- not as we would like them to be." This certainly applies to the KPERS issues we must deal with head on.
I have been appointed to the Senate Select Committee on KPERS. We will be working on HB 2533. The KPERS retirement plan is a Defined Benefit (DB) plan. DB plans have historically been woefully underfunded in both the public and private sectors.
The KPERS DB plan is underfunded by at least $9 billion dollars. In order to stop making the hole deeper, we need to stop digging. Current employees will stay in the existing DB plan and receive all retirement benefits as scheduled. New employees coming on board after January 1, 2015 will be part of a new plan inside KPERS. The new plan is known as a "Cash Balance" plan.
There are three types of retirement plans - defined benefit plans (DB), defined contribution plans (DC), and cash balance plans (CB). Each will be briefly discussed below.
Defined Benefit Plan (DB)
- A specified, "defined" benefit at retirement
- Benefit based on factors like salary, age and years of service
- Kansas taxpayers bear all investment risk
Defined Contribution Plan (DC)
- Commonly known as a 401K plan
- Provides an individual account for each participant
- Employee bears all investment risk
Cash Balance Plan (CB)
A "cash balance" plan is a type of defined benefit plan that includes some elements of a defined contribution plan. Cash balance plans tend to share risk between employer and employee.
- There is a guaranteed 4.0 percent interest credited to the employee's contribution account. Plus additional interest (0 to 2 percent) based on KPERS investment returns and funding.
- At retirement, the ending account balance is annuitized to create a guaranteed monthly income.
Following the sharp stock market decline in 2009 CB plans are becoming popular in both the public and private sectors.
Projections indicate converting new employees to the Cash Balance type of plan will result in the existing DB plan being funded to an appropriate amount by 2030 or so. A long runway for sure but it is a long term solution to a problem that cannot be postponed.
The Kansas commitment to KPERS is huge. To put it into perspective, the amount of annual funding to keep the plan actuarially sound will require $1 billion in annual state contributions. This is more than the Kansas spends on its portion of Medicaid.