Trustees of the Kansas Public Employees Retirement System on Friday decided to retain the current 7.75% investment return assumption rather than heed a recommendation of consultants to lower the foundational economic measure to more closely reflect national expectations.
The decision to maintain the status quo for three years avoided profound financial implications for KPERS, which serves 300,000 current or former public employees. A 0.25% reduction in the investment-return forecast would have driven up the system's unfunded actuarial liability by $569 million and shrinkage of 0.5% would have equated a $1.2 billion surge in that unfunded long-term liability.
The decision by trustees was influenced by reports of a preliminary gross total return of 17.5% on KPERS' assets in calendar 2019. That was a reversal from KPERS' minus-2.6% in calendar 2018.
Cavanaugh Macdonald Consulting, an Atlanta firm providing actuarial and benefits advice to KPERS and other public sector pension plans, urged KPERS' board to consider a downward revision to reflect a lower estimate of inflation and of real return on investment.
The Kansas system's investment return assumption stood at 8% from 1986 until decreased to 7.75% in 2016. Only a dozen of 129 pension plans in a peer group survey used an investment return assumption above 7.5%. Seventy pension plans in the study ranged from 7% to 7.5%.
"If you bought some bonds today, you're just not going to earn very much on those because we have very low interest rates. That's different from if you were buying bonds 30 years ago," said Brent Banister, of Cavanaugh Macdonald Consulting.
Banister said as long as bond rates remained low, it would be difficult to achieve the current level of return envisioned by KPERS. Other professional analysts, he said, offered compelling arguments for lowering the price inflation projection from 2.75% to 2.5% and for trimming real return at KPERS from 5% to 4.75% for a total return assumption of 7.25% going forward.
However, board members didn't buy the consultants' evaluation, in part, due to the Kansas system's strong performance last year.
"It's difficult for me to say why we should take another reduction. We went 35 years with no change and we made one and now we're talking about making another. That's troublesome as a trustee," said James Zakoura, of the KPERS board. "The KPERS way, as I understand it, is steady as you go and really thoughtful. Every three years we have a chance to look at this."
Board trustee Ernie Claudel said he was convinced action to escalate the unfunded liability of KPERS could have an unsettling influence on members of the Kansas Legislature responsible for appropriations to the system.
"If we do anything that might guide them away and get them to give up, by increasing the unfunded actuarial liability, then we're doing our constituents a disservice. That's what frustrates me to keep beating on this number when I don't see over the course of time ... it makes any difference," Claudel said.
"Maybe I'm missing something, but I don't see anything being worshiped here but numbers," he told consultants. "Nothing has to do with the concern about the fiduciary responsibility."
Board member Emily Hill said the KPERS trustees weren't appointed to make "political" decisions about the pension system for benefit of state lawmakers.
"We could have a serious discussion about that in private," Claudel said.
KPERS serves 300,000 active, inactive and retired members and manages $19 billion in assets. The membership is drawn from government personnel who work for 1,500 state and local employers.