Kansas' pension system had one of its best years ever in 2021. Where does it go from here?
The Kansas Public Employees Retirement System saw its investment portfolio turn in one of the strongest years ever in the 2021 fiscal year — although lawmakers are still parsing out how to handle a significant unfunded liability going forward.
Pension funds nationally have announced sky-high investment returns, powered by a stock market that has rebounded from the COVID-19 pandemic, helping states beat out their expected gains several times over.
Kansas was no exception, KPERS Spokesperson Kristen Basso said in an email, reporting a 26.3% rate of return for the 2021 fiscal year, which ended in June. For context, that is the third highest return in the past 45 years and well above the state's assumed rate of return of 7.75%.
The return does trail the performance of the Standard and Poor 500 Index over the same time period, although Basso said it was still higher than the state's average return over the last decade, which has hovered around 9%.
It is also a marked shift from where many expected the economy to be in the midst of the COVID-19 pandemic. The pension fund only returned 1.7% in the 2020 fiscal year, which included the early months of the pandemic, with KPERS officials telling legislators last year they were bracing for more of the same going forward.
“Uncertainty has certainly been the watch word,” Elizabeth Miller, chief investment officer at KPERS, said in September. “The pandemic really overwhelmed everything."
KPERS, managed by a state agency and governed by an independent board, covers most retired state and local employees, with the exception of judges and police and firefighters, who have separate plans.
State legislators and local officials make contributions to the state's hare, as do the workers themselves. The rest is covered by the investment performance of the fund itself.
Can Kansas build on booming pension investments?
But experts have underscored that the investment returns in 2021, while a boon for states like Kansas, are the exception rather than the norm. There is a risk if the economy slips in the years to come that the state will find itself in even more perilous terrain.
"Simply put, public pension systems should view this year’s excellent investment returns as an outlier, not a norm," Anil Niraula wrote in a report for the Reason Foundation, a conservative think tank. "Once the current market rebound ends, most experts say the long-term funding prospects for state and local pension plans remain poor."
Kansas assumes its investments will return gains of at least 7.75% each year — a number higher than funds in all four of its neighboring states, according to the National Association of State Retirement Administrators. Only six of the 127 funds reviewed by NASRA showed anticipated returns of higher than 7.5%.
Pivoting to a more conservative assumption would require either the state or employers to increase their contribution into the fund, something which is unlikely in the current climate — although it may have to happen eventually.
Rep. Steven Johnson, R-Assaria, chair of the House Insurance and Pensions Committee, noted that reducing the expected rate of return by as little as a quarter of a percentage point could increase the amount the state would need to pay in by $1 billion.
"We've met the return assumption over virtually any timeframe you want to choose," Johnson said. "If you get a reasonable amount of time, [the return] is still managing to get there. I do agree that we're going to have to find a way to move that lower over time."
The state is already staring down the barrel of over $6 billion in its share of KPERS' unfunded liability as of the end of December 2020, financial documents show. The total unfunded liability is on the order of $8.5 billion.
There has been improvement in recent years.
A state's funding ratio shows whether it has the ability to pay out benefits that have already been committed. KPERS was only 56% funded in 2012 but the strength of the economy in recent years has seen that rise to over 70% as of December, 2020.
That was helped by a $115 million payment in 2019, which aimed to catch the state up on a series of missed payments when the state was experiencing budget shortfalls earlier in the decade.
And Johnson pointed to changes in 2015, where most new employees after that point would see their guaranteed benefit decrease, with their monthly pension instead tied to the market performance of investments.
While he agreed that the market wouldn't continue on the same trajectory, Johnson said there was cause for optimism and a general desire not to return to the uncertainty that plagued the state in years prior.
"We happen to have had phenomenal returns," Johnson said. "But we want to make sure that we take a long term look at it. And it's nice to see a number that is 26%, but ... we can't plan on 26% a year by any stretch. It's just a consistent approach (is needed) to whatever problem we're facing."