kpers update · 2018. 1. 5. · kpers update financial institutions and pensions 1 working after...

KPERS Update

Financial Institutions and Pensions

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Working After Retirement, Governor’s Budget Proposal and Triennial Experience Study

Presented by: Alan D. Conroy, Executive Director

Phone: 785-296-6880

Email: [email protected]

January 25, 2017

Kansas Public Employees Retirement System

KPERS is a fiduciary providing retirement, disability and survivor benefits to our members and their beneficiaries with a 97-member staff.

KPERS administers three statewide, defined benefit plans for public employees.

• Kansas Public Employees Retirement System

• Kansas Police and Firemen’s Retirement System

• Kansas Retirement System for Judges

KPERS partners with more than 1,500 state and local government employers.

• State of Kansas

• 286 school districts

• 105 counties

• 424 cities and townships

• Other employers include libraries, hospitals, community colleges and conservation districts

Dependable Benefits. Trusted Partner.

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KPERS OverviewBoard of Trustees

Chairperson Lois Cox, CFA, CFP, ManhattanDirector of Investments,

Kansas State University FoundationAppointed by the Governor

Vice-Chairperson Kelly Arnold,WichitaCounty Clerk, Sedgwick CountyAppointed by the Governor

Ernie Claudel, OlatheRetired teacherElected member – school

Shawn Creger, Prairie VillageFinancial Advisor, Edward JonesAppointed by the Speaker of the House

Ron Estes, WichitaKansas State TreasurerStatutory member

Todd Hart, OlatheDeputy Chief, Olathe Fire DepartmentElected member - non-school

Suresh Ramamurthi, TopekaChairman, CBW BankAppointed by the President of the Senate

Michael Rogers, ManhattanCertified Public AccountantAppointed by the Governor

Vacant PositionGovernor’s Appointment

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Governor’s Recommended Funding

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• No Repayment of FY 2016 Contribution Reduction

• Lower Employer Contributions

• Re-amortization

• Long term effects

Governor’s Recommendation

No repayment of FY 2016 contribution reduction

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• $97 million in employer contributions was deferred during the 4th

quarter of FY 2016.

• Current statute requires repayment of the contributions plus 8% annual interest by the end of FY 2018.

• The Governor’s recommendation eliminates the repayment.

• The result is $97 million in lost contributions and another $18 million in lost interest payments ($115 million total).


• Governor’s recommendation freezes the FY 2016 contribution amount for FY 2017, FY 2018 and FY 2019.

– The FY 2016 contribution amount was already reduced by nearly $100 million.

• Equates to losing four quarters, or 1 full year, of contributions over a four-year period.

– For those years, also suspends 1.2% annual rate increase established by 2012 KPERS reform legislation to address underfunding dating to 1993

– Does not reflect changes in payroll.

• Reduces employer contributions to KPERS by $596 million over three years (including the $115 million lost due to not repaying the deferred FY 2016 contributions).

Contribution reduction in FYs 2017, 2018 and 2019

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Total reduction over three years

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$1,746

$1,150

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Em

plo

yer

Co

ntr

ibu

tio

ns

(do

llars

in m

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ns)

FY 2017, FY 2018 and FY 2019 Total

Projected 3-Year Total of KPERS Employer ContributionsState/School Group*

Current Statutory Contributions**Governor's Recommended Contributions

*The State pays the entire KPERS-School employer contribution as part of state aid to local districts. **Current statutory projection of employer contributions includes $115 in delayed FY 16 employer contributions plus interest scheduled to be paid in FY 2018.

$596 millionreduction over 3 years

Employer Contributions

Year by year reductions

8

$480.8

$657.1

$607.7

$383.3 $383.3 $383.3

$-

$100

$200

$300

$400

$500

$600

$700

2017 2018 2019

Em

plo

yer

Co

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ibu

tio

ns

(do

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in m

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ns)

Fiscal Year

Projected KPERS Employer ContributionsState/School Group*

Current Statutory Contributions**Governor's Recommended Contributions

*The State pays the entire KPERS-School employer contribution as part of state aid to local districts. **FY 2018 employer contributions include $542 million in employer contributions and $115 in delayed FY 16 employer contributions plus interest.

$97.5 millionreduction




• The current 40-year amortization schedule was set in 1993

• Existing unfunded actuarial liability is scheduled to be paid by 2033.

• The Governor’s recommendation is to extend the end date by 10 years to 2043.

• Extending the amortization lowers required annual employer contribution rates. However, extending the amortization –

– Does not impact FY 2017, FY 2018 or FY 2019 State/School employer contribution rates

– Results in rates of 12% to 13% for an additional 10 years

– Increases the overall cost to pay off the unfunded liability by $6.5 billion.

– Decelerates improvement in the funded ratio, leaving KPERS vulnerable to market downturns for many years (in the “cautionary” 60% range through 2030, 8 years longer than current statute)

– Increases the peak unfunded actuarial liability by $1.3 billion. The unfunded actuarial liability would not be expected to return to 12/31/2015 levels for 20 years.

• By statute the KPERS Board sets the amortization schedule.

• Legislation is required for the Governor’s recommendation to take effect.

Adding 10 years to the amortization schedule

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Funded ratio projection

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

12/31 Valuation

Projected State/School Funded RatioWith 10 Year Amortization Extension

Current Statutory Projection

Governor's Recommendation Projection

Funded ratio remains below 70% through 2030, eight years longer than under current statute .

Funded ratio remains below 80% through 2036, eight years longer than under current statute .


Unfunded actuarial liability

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$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

Projected State/School Unfunded Actuarial Liability

Governor's Recommendation Projection Current Statutory Projection

Governor's recommendation projection peaks at $8.6 billion in 2023. Governor's recommendation projection

doesn't go below $7.3 billion until 2033.

Current projection peaks at $7.3 billion in 2019.


• The current State/School statutory employer contribution rate for FY 2018 is 12.01%.

• Freezing contributions at the FY 2016 contribution amount lowers the FY 2018 State/School statutory contribution rate to 7.88%, about a third less than current law.

• Extending the amortization period reduces the actuarial required contribution rate to about 13%. However –

– After the 3-year freeze, the statutory rate is lower than the actuarial rate until FY 2024

– Actuarial contribution rates remain around 13% through FY 2044, rather than falling below 2% beginning in FY 2036

• The total cost to pay off the unfunded liability is projected to increase by $6,500,000,000 over the next 30 years.

Employer contributions

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12

.12

%

10

.91

%

12

.34

%

12

.74

%

13

.21

%

13

.57

%

13

.58

%

7.8

8%

7.9

3% 9.1

3%

10

.33

%

11

.53

%

12

.73

%

13

.58

%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2018 2019 2020 2021 2022 2023 2024

% o

f P

ayro

ll

Fiscal Year

Governor’s Recommendation Projected State/School Employer Contribution Rates

Actuarial Rates Statutory Rates


Long-term effects

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• Effect on Funding

– The State/School’s employer contribution rate will eventually settle at around 13% through FY 2045.

• Local employer contribution rates are not affected

– KPERS’ funded ratio will stay in the 60% “cautionary” range for many more years.

– The State/School unfunded actuarial liability is projected to peak at $8.6 billion, $1.3 billion higher than the peak unfunded actuarial liability under current law.

– The proposal raises the chance that the Governmental Accounting Standards Board (GASB) net pension liability reflected in the accounting balance sheet of KPERS employers will increase (GASB affects accounting balance sheets, not funding).

– The reduced contributions being recommended affect the cash flow projection and will require a higher cash allocation to meet cash flow needs.

• Effect on Members

– Current retirees (and those thinking about retiring) are not affected.

– Employee contributions are not affected. They are fixed by statute.

Triennial Experience Study

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• Review of actuarial assumptions

• Investment return assumption

• Amortization method

• Impact of changing assumptions

Experience Study

• KPERS actuary and Board of Trustees review the actuarial experience of the System every three years as required by law.

• The current review covered calendar years 2012 to 2015.

• All economic and demographic actuarial assumptions were reviewed, as well as actuarial methods and the amortization period.

• Changes to actuarial assumptions will first be reflected in the 12/31/2016 valuation, which will be used for CY 2019 local employer contribution rates.

Review of actuarial assumptions

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Experience Study

• The Board has a fiduciary responsibility to set the actuarial assumptions using their best judgement in light of available information.

• The assumptions are long-term in nature and try to anticipate what will happen over decades, not react to short-term trends.

• Having accurate assumptions is important so that costs aren’t too high today or passed on to future generations.

Review of actuarial assumptions

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Experience Study

• The current trend among public pension plans is lowering of investment return assumptions.

• For many years the median investment return assumption for public plans was 8%, but is now 7.5%.

• The actuarial inflation assumption, which is a component of the investment return assumption, was reduced from 3.00% to 2.75%.

• Based on the recommendation of KPERS’ investment and actuarial consultants and the current environment of public pension plans, the Board voted to lower the long-term investment return assumption from 8% to 7.75%.

Investment return assumption

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Experience Study

• The changes do not impact benefits for current retirees.

• The changes do not impact employee contributions.

• The changes do not impact Local employer contribution rates for CY 2017 and CY 2018.

• The changes will increase employer contributions in the future (starting in CY 2019 for Local employers).

– The initial increase in the actuarial rate was projected to be 0.7%

• The estimated unfunded actuarial liability for the total System increases $565 million, or 6.6%.

• The estimated funded ratio for the total System decreases from 67.1% to 65.7%.

• The 12/31/2016 valuation will reflect both the changes in the actuarial assumptions and the actual experience (investments, demographics, etc.) and the results will differ from the estimates.

Impact of changing assumptions

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Working After Retirement

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• Legislative changes

• Basic working after retirement rule

• Certification of no prearrangements

• Grandfathered positions

• Special education, Hard-to-fill, and Hardship exemptions

• Assurance protocols

• Cumulative limits

• Sunset


Why were changes made

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•

•

•

•


Retirement Trends: 2009-2014

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• Retirees returning to work as licensed teachers retired at younger ages than retirees not returning to work during that period

• Licensed teachers have a financial incentive to retire at younger ages under the working after retirement rules in effect since 2009


Addressing policy issues

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Cost considerations

• The new policy reduces the financial incentive for members to retire and return to work

• Contributions on retiree earnings offset some of the cost to the System

Staffing considerations

• Special education and hard to fill licensed positions can still be filled with a retiree when recruitment efforts fail

• Emergency vacancies can be filled with retirees

• Daily call substitutes are not subject to the working after retirement policy

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•

–

•

•

•

•

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• Makes explicit that no prearranged agreement to return to work for a KPERS employer is a condition of retirement

• Requires members to affirm on their application for retirement that –– They will not be employed with any participating employer within 60 days of

retirement

– They have no prearrangement to return to work with any KPERS affiliated employer

• Requires the employer’s appointing authority, at the point of rehiring a KPERS retiree, to affirm that –– The retiree has not been employed by the participating employer within 60 days of

the retirement

– That there was no prearranged agreement for employment

• Prearrangements are not permissible before retirement or completion of the 60-day waiting period

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• Prearrangements are determined by facts and circumstances indicating that the employer and employee “reasonably anticipated that further services would be performed after the employee’s retirement” as stated in an IRS private letter ruling

– May include written or verbal understanding

• Penalties for prearrangements are established –

– The retiree’s benefit will be suspended starting in the month the retiree returned to work and ending six months after the retiree ends employment

– Employers are to pay KPERS’ costs associated with the prearrangement, such as –•

•

•


• Retirees who retired before May 1, 2015 can work without an earnings limit in a licensed school professional position until July 1, 2020

– Previously scheduled to sunset on July 1, 2017

– Employer contributes actuarial required contribution plus 8% (24.03% in FY 2017)

• Retirees who accepted employment or returned to work for a different employer in a non-licensed position before May 1, 2015 can work in that same position indefinitely without an earnings limit

– Employer contributes actuarial required contribution plus 6% (22.03% in FY 2017)

• Retirees who accepted employment or returned to work for the same employer in a non-licensed position before May 1, 2015 can work in that same position indefinitely

– Employee is subject to $25,000 earnings limit

– Employer does not pay an employer contribution

• Retirees who returned to work in any position prior to July 1, 2006 are grandfathered indefinitely

– No employer contribution

• If a grandfathered retiree in a non-licensed position changes position or has a break in service, the retiree will lose grandfathered status

Grandfathered Positions

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• Retirees in special education teacher positions are not subject to the earnings limitation for up to 36 months or 3 school years, whichever is less

• Retirees who have worked under the exemption for the 3-year maximum are then subject to the earnings limitation

• If employer meets the requirements of an assurance protocol and maintains documentation, can extend exemption for one year

• Retirees make no (direct) employee contributions

• Employers report each retiree to KPERS and contribute at a rate of 30% on all compensation

• Employers must maintain documentation of efforts to fill the position with a non-retiree throughout the exemption

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• Retiree hired in a “top 5” hard-to-fill licensed position (as designated annually by Department of Education) is not subject to earnings limitation for lesser of 36 months or 3 school years

– For 2016-2017 school year: (1) secondary-level English Language and Literature; (2) secondary level science; (3) elementary classroom teacher; (4) secondary mathematics; and (5) fine arts

• Retirees who have worked under the exemption for the 3-year maximum are then subject to the earnings limitation





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• Retiree hired in a hardship position (as designated by the agency’s governing authority) is not subject to earnings limitation for one school or calendar year

• Retirees who have worked under the exemption for that one year are then subject to the earnings limitation


– The employer can extend a hardship position through the assurance protocol a total of three times




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• An employer can extend an exempt position by submitting an assurance protocol to KPERS

• The assurance protocol is to be signed by the superintendent and school board president, if submitted by a school district employer

• The assurance protocol must state that the position was advertised on multiple platforms for a minimum of 30 calendar days, and at least one of the following conditions occurred:

– No applications were submitted for the position

– If applications were submitted, none of the applicants met the reference screening criteria of the employer

– If applications were submitted, none of the applicants possessed the appropriate licensure, certification or other necessary credentials for the position

• The Joint Committee on Pensions, Investments, and Benefits can review employer’s documentation of efforts to recruit a non-retiree for the position

– The Committee can revoke an exception if they find an employer has not made adequate efforts to fill the position on an permanent basis

• KPERS field auditors will begin checking that the provisions of the new working after retirement law are being met by employers

Assurance Protocol

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• The total time individual retirees can work without an earnings limit is capped if working under –

– The grandfathered licensed school professional exemption

– Special education teacher exemption

– Hard-to-fill position exemption

– Hardship position

– ANY COMBINATION of these exemptions

• Cumulative limit is total of 48 months or 4 school years, whichever is less

Cumulative limits on working after retirement

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• Most of the new working after retirement rules are now scheduled to sunset on July 1, 2020

– Does NOT apply to provisions –

• Making the prearrangement prohibition a condition for retirement

• Requiring members to affirm there are no prearrangements as part of retirement application

• Penalties for prearrangements

• The sunset requires the Legislature to take positive action to maintain or modify the new working after retirement rules

– Would provide opportunity for review of stakeholders’ experience with the new policies

Sunset

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Questions?

kpers update · 2018. 1. 5. · kpers update financial institutions and pensions 1 working after...

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