KANSAS PUBLIC EMPLOYEES RETIREMENT SYSTEM. Bills Signed into Law

Transcription

1 KANSAS PUBLIC EMPLOYEES RETIREMENT SYSTEM House Substitute for SB 168 (Law) Bills Signed into Law House Substitute for SB 168 contains multiple policy and technical changes to KPERS statutes. As it pertains to working after retirement, the bill would make several changes to existing policy, including: Requiring members to sign an affirmation on their application for retirement that they will not be employed with any participating employer within 60 days of retirement and that they have no prearrangement to return to work with any KPERS affiliated employer. o At the point of rehiring a KPERS retiree, the employer s appointing authority has to sign an affirmation that the retiree has not been employed by the participating employer within 60 days of the retirement and that there was no prearranged agreement for employment. o If a member is found to have entered into a prearranged agreement to return to work before retirement, 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; o Employers who violate the prearrangement rules indemnify the System for costs to the System and pay all fines and fees associated with prearrangement; o Retirees and employers are not allowed to discuss employment before retirement and through the 60-day waiting period; o A prearranged agreement is when the employee and employer reasonably anticipated that further services would be performed after the employee s retirement as indicated by the facts and circumstances; Extend from July 1, 2017, to July , the grandfather provisions for those retirees in a licensed school professional position who had retired before May 1, 2015; Establish an assurance protocol to allow employers to meet a set of criteria to extend a hardship, hard-to-fill or special education position rather than obtaining approval from the Joint Committee on Pensions, Investments, and Benefits (HB 2653); Allow for employers to extend a hardship position for up to three 1-year extensions; Clarify that hard-to-fill and special education exemptions can only be extended for one year; Clarify that a 48-month or 4-school year (whichever is less) limit applies to total time worked by a retiree for any combination of positions under grandfathered licensed school professionals, hardship, hard-to-fill, and special education exemptions; May 2016

2 House Substitute for SB 168 (Law) Establish a 4-year sunset (ending June 30, 2020) for the hardship, hard-to-fill and special education exemptions; Establish a 30% employer contribution rate for retirees working in positions that are exempt from the general working after retirement rules (hardship, hard-to-fill, special education); Adds a new exemption from working after retirement provisions for election poll workers. Increase the annual earnings cap for KP&F retirees from $15,000 to $25,000, matching the KPERS earnings limit; Delay the initial review of the $25,000 earnings limit from July 1, 2016 to July 1, In addition, SB 168 includes the contents of HB 2489 as amended by House Committee. This language makes several technical amendments to existing KPERS statutes, including: 1. KPERS 3 Service-connected Death: When a member dies due to an on-the-job accident their surviving spouse or dependents are entitled to a monthly benefit equal to 50% of the member s final average salary. Because there is no final average salary for the KPERS 3 cash balance plan design, SB 168 provides for KPERS 3 members death benefit to be based on an average of their final three years of compensation. 2. Death and Disability moratorium: The 2015 Legislature included a moratorium on employer contributions to the Death and Disability fund for a portion of FY 2016 and FY SB 168 clarifies and codifies a moratorium beginning March 25, 2016, and ending June 30, 2017, as approved by the Legislature through the appropriations process in 2015 and KPERS 3 early retirement annuity interest rate: The 2014 Legislature enacted HB 2533, which made several adjustments to the KPERS 3 cash balance plan design. One of those adjustments was changing the retirement annuity interest rate from a set 6% to the actuarial assumed interest rate of return minus 2% (which currently is equal to 6%). The KPERS 3 early retirement statutes were omitted from the updated references in SB168 adds parallel language to make the retirement annuity rate consistent among all retirement options for KPERS 3 members. Local Employer 401(a) Plan Option. K.S.A b14 would be amended to authorize creation of a 401(a) plan for local employers, providing a flexible vehicle for optional employer contributions. Currently there is inadequate statutory basis for local employer contributions to the KPERS 457 plan or to establish a 401(a) plan for local employers. State Tax Treatment of Roth 457 Option. KPERS has sufficient existing authority to establish a Roth 457 component to the KPERS 457 plan. However, a statutory amendment is needed to address the state tax treatment of Roth contributions, which are made on a post-tax basis for federal tax purposes. KPERS-KPERS 457 Data. This amendment to K.S.A b10 would provide for KPERS member data, such as projected pension benefits, to be shared with the KPERS 457 plan to benefit KPERS 457 participant retirement income planning. SB 168 also includes language that allows for a member who enters the deferred retirement option program (DROP) to have their benefit recalculated at the end of the DROP period in order to address technical issues with including sick and annual leave 2 of 24

3 House Substitute for SB 168 (Law) payments made at retirement in final average salary. This language was included to address an issue with the timing of sick and annual leave payouts and calculating final average salary. Senate Select Committee on KPERS Law The policy changes contained in House Substitute for SB 168 have the potential to affect retirement decisions of KPERS members. If a member is able to retire and receive both a pension and a salary from a KPERS employer, they may decide that it is in their best financial interest to retire at a younger age than they may have otherwise retired. The requirement of a 30% employer contribution rate on retiree payroll would offset the actuarial cost to a certain extent. In addition, if employers require rehired retirees to reduce their negotiated salary due to the 30% contribution rate there may be retirees who decide the costs outweigh the potential benefit. Requiring employers and retirees to sign a document that there has been no prearranged agreement to return to work could also reduce the number of members who decide to retire and return to work. However, because these policies affect member behavior, the exact costs cannot be calculated. Likewise, the actuarial impact from an earnings limit increase for KP&F retirees returning to work for the same employer cannot be calculated. KP&F retirees generally are eligible to retire with full benefits at younger ages than KPERS members, and therefore, may be able to return to work while earning benefits for longer periods of time. However, it is common for KP&F retirees to return to work in a covered position for a state, school or local employer affiliated with KPERS. In these cases, the retiree is enrolled as a new member of KPERS and begins contributing and earning a new benefit under KPERS, while receiving KP&F retirement benefits without any limitation on earnings. As a result, retirement incentives for KP&F members may be affected less by the earnings limit on returning to work for the same employer than opportunities to work in a KPERS-covered position. There are no additional costs associated with the technical and logistical changes that were included in SB 168. The Death and Disability Program is entirely financed with employer contributions as a pay-as-you-go system. The moratorium is expected to reduce the projected ending balance to around $27 million at the end of FY The actuary for the program has suggested an ending balance of around $10 million. There is a statutory safety valve to provide funding for the program should the fund balance for the program ever be depleted. The Conference Committee in House Substitute for SB 168 included the contents of HB 2489 and changes to the deferred retirement option program (DROP). As introduced last session, SB 168 originally provided for the issuance of bonds to 3 of 24

4 House Substitute for SB 168 (Law) provide up to $1.0 billion in proceeds to be deposited toward the unfunded actuarial liability of the KPERS State/School Group. The House Pensions and Benefits Committee recommended House Substitute for SB 168 favorably for passage after deleting the contents of the bill and inserting HB 2700, as amended by the House Pensions and Benefits Committee. HB 2700 previously was amended by the House Pensions and Benefits Committee to include provisions from HB 2653 and HB of 24

5 Appropriations Provisos (Law) House Sub for SB 161 provided for the delay of up to $100 million in State and School contributions to the Retirement System for fiscal year House Sub for SB 249 provided that the delayed contributions would be repaid in full, with interest at 8%, by June 30, Law The Director of the Budget used this new allotment authority to delay the last quarterly payment for KPERS-School employer contributions in FY 2016 and the KPERS-State employer contributions funded from the State General Fund for the last three pay periods of FY These delayed contributions totaled $97.4 million. The delayed contributions are required to be repaid by the end of FY 2018 with 8% interest. The contributions will be accounted a long-term receivable, and therefore treated as FY 2016 employer contributions, interest will be accounted for in the year it is accrued. This has no effect on the payment of benefits. 5 of 24

6 Bills that Died in Committee in the Second Chamber House Bill 2489, As Amended by House Committee HB 2489 makes several technical amendments to existing KPERS statutes, including: KPERS 3 Service-connected Death: When a member dies due to an on-the-job accident their surviving spouse or dependents are entitled to a monthly benefit equal to 50% of the member s final average salary. Because there is no final average salary for the KPERS 3 cash balance plan design, HB 2489 provides for KPERS 3 members death benefit to be based on an average of their final three years of compensation. Death and Disability moratorium: The 2015 Legislature included a moratorium on employer contributions to the Death and Disability fund for a portion of FY 2016 and FY HB 2489, as amended, clarifies and codifies a moratorium beginning March 25, 2016, and ending June 30, 2017, as approved by the Legislature through the appropriations process in 2015 and KPERS 3 early retirement annuity interest rate: The 2014 Legislature enacted HB 2533, which made several adjustments to the KPERS 3 cash balance plan design. One of those adjustments was changing the retirement annuity interest rate from a set 6% to the actuarial assumed interest rate of return minus 2% (which currently is equal to 6%). The KPERS 3 early retirement statutes were omitted from the updated references in HB 2489 adds parallel language to make the retirement annuity rate consistent among all retirement options for KPERS 3 members. As amended, HB 2489 also contains the provisions of HB 2541, which would make three changes relating to the KPERS 457 plan established under K.S.A b01 et seq. Local Employer 401(a) Plan Option. K.S.A b14 would be amended to authorize creation of a 401(a) plan for local employers, providing a flexible vehicle for optional employer contributions. Currently there is inadequate statutory basis for local employer contributions to the KPERS 457 plan or to establish a 401(a) plan for local employers. State Tax Treatment of Roth 457 Option. KPERS has sufficient existing authority to establish a Roth 457 component to the KPERS 457 plan. However, a statutory amendment is needed to address the state tax treatment of Roth contributions, which are made on a post-tax basis for federal tax purposes. KPERS-KPERS 457 Data. This amendment to K.S.A b10 would provide for KPERS member data, such as projected pension benefits, to be shared with the KPERS 457 plan to benefit KPERS 457 participant retirement income planning. Senate Select Committee on KPERS No additional expenditure authority would be required for any administrative costs associated with the changes contained in HB 2489, as amended. The Death and Disability Program is entirely financed with employer contributions as a payas-you-go system. The moratorium is expected to reduce the projected ending balance to around $27 million. The actuary for the program has suggested an ending balance of around $10 million. There is a statutory safety value to provide funding for the program should the fund balance for the program ever be depleted. The contents of HB 2489 were included in the Conference Committee report on House Substitute for SB of 24

7 House Bill 2724, As Amended by House Committee of the Whole HB 2724 precludes any payments made to any KPERS member on or after July 1, 2016, under a 409A or 457(f) plan from being considered as compensation for purposes of figuring a member s final average salary. These plans are contractual agreements between an employer and individual employee. This prohibition would not apply to the more common 457(b) deferred compensation plans offered by the State and many other public employers. In addition, a House floor amendment would require that all KPERS and KP&F employers submit a one-time report of the vacation and sick leave balances for each of their active members as of July 1, House Committee on Appropriations Senate Ways and Means Committee Excluding 457(f) payments from inclusion in KPERS compensation/salary is likely to result in a reduction in benefits for a member receiving the payment. However, IRS laws and existing KPERS statutes currently serve to limit the impact of any 457(f) payments on the member s KPERS benefit. The IRS sets a contribution limit on earnings on which contributions are made, but does not cap actual earnings. The IRS also sets a maximum limitation on the gross annual benefit amount for a member. These limits are set annually by the IRS for each calendar year. Kansas has adopted the IRS limitation levels by statute. In addition, KPERS has enacted a cap law, which limits the effect of 457(f) benefits on final average salary for KPERS 1 and KPERS 2 members. If a KPERS 1 member s compensation for any year used in calculating his or her final average salary is more than 15% higher than the preceding year (7.5% for KPERS 2 members), the amount which exceeds the 15% (or 7.5%) is not included in compensation for purposes of calculating final average salary. Therefore, the increase in a member s final average salary due to 457(f) benefits would be capped at 5% for KPERS 1 members and 1.5% for KPERS 2 members. KPERS 3 benefits are calculated based on account balances, rather than final average salary, and therefore, KPERS 3 accounts reflect compensation earned throughout a career not the highest three to five years of compensation. Moreover, contributions on 457(f) benefits paid at or near retirement would earn interest for very limited period of time. While HB 2724 would reduce the benefit to some degree of any KPERS member who receives a 457(f) payment, there would not be an actuarial impact on the System as a whole. Due to the highly infrequent nature of 457(f) payments (2 over the last 20 years, 90,000 retirements), no measurable, material actuarial impact would be expected if such payments were to be excluded from final average pay calculations. Therefore, no changes to employer contribution rates would be expected based on HB The one-time report of active members vacation and sick leave balances would not be used in any way to determine member benefits. 7 of 24

8 Bills that Died on the Senate or House Floor House Bill 2709, As Amended by House Committee HB 2709, as amended, would change the spousal benefits for KP&F members who die from service-connected causes. Currently, if a member dies due to service-connected causes, the surviving spouse is entitled to 50% of the final average salary at the time of the member s death. In addition, any surviving dependent children are entitled to 10% of the member s final average salary for each child. However, the total benefit cannot exceed 75% of the final average salary. Under HB 2709, the surviving spouse benefit would be the greater of 50% of the member s final average salary or the amount that the member s retirement benefit would have been had the member elected to retire on the 1 st of the month following the date of death and elected the joint and 100% survivor benefit option. In addition, the member s surviving spouse would receive a lump sum benefit equal to 100% of the member s final average salary. There is no change to the benefits of the surviving children. HB 2709, as amended, increases the total cap on benefits to 85% of final average salary. However, to the extent that the spousal benefit is more than 60% of final average salary, the maximum benefit available for the surviving children may be decreased. House Committee on Appropriations House Floor The actuary analyzed the actuarial cost of HB Based on the actual service-connected death experience of the System, the actuary estimated that the changes proposed in HB 2709 would increase the KP&F unfunded actuarial liability by $605,000 resulting in a 0.01% increase in the UAL portion of the employer contribution rate. In addition, the normal cost of benefits would also increase by 0.01% for a total increase in the employer contribution rate of 0.02%. This increase in the employer contribution rate would result in additional revenue to the Trust Fund. However, the impact of 0.02% on just the KP&F employer contribution would be a very small change in revenues of less than $50,000. The addition of a lump sum benefit would also increase the unfunded liability of the KP&F group by an additional $750,000 and increase the actuarial required contribution rate by 0.06%. 8 of 24

9 House Bill 2488 Bills that Died in Committee in the Chamber of Origin Under each retirement plan administered by KPERS (KPERS, KP&F, and Judges), a $4,000 death benefit is provided to the beneficiaries. HB 2488 provides that, if a member has retired from more than one of these plans, the beneficiary may receive a death benefit from each plan (but not more than two). The actuary analyzed who would be eligible for two death benefits under HB The total number of current members and retirees who would be eligible for two death benefits is 1,540 out of 295,000 members of plans administered by KPERS. Using those totals, the actuary estimated the impact to KPERS unfunded actuarial liability. For KPERS, HB 2488 is estimated to increase the unfunded actuarial liability by $656,938, or less than 0.01% of the current $8.7 billion UAL. For KP&F, the increase in the actuarial liability is $607,163, or 0.08% of the UAL of $726 million. For Judges, the liability increased by $132,450, which is 1.25% of the current UAL of $10.6 million. We estimate the increase in the UAL amortization rate would be 0.0% for KPERS, 0.01% for KP&F, and 0.03% for Judges. The actuary also estimated the cost of future members using the same proportion of current members eligible for two death benefits. This results in a net impact to KPERS actuarial required contribution rate of less than %. For KP&F, the impact is 0.001%, and for Judges, it is 0.008%. Combined with the UAL change noted above, the approximate total cost in terms of the actuarial required contribution rate would be 0.00% for KPERS, 0.01% for KP&F, and 0.04% for Judges. 9 of 24

10 House Bill 2541 HB 2541 would make three changes relating to the KPERS 457 plan established under K.S.A b01 et seq. Local Employer 401(a) Plan Option. K.S.A b14 would be amended to authorize creation of a 401(a) plan for local employers, providing a flexible vehicle for optional employer contributions. Currently there is inadequate statutory basis for local employer contributions to the KPERS 457 plan or to establish a 401(a) plan for local employers. State Tax Treatment of Roth 457 Option. KPERS has sufficient existing authority to establish a Roth 457 component to the KPERS 457 plan. However, a statutory amendment is needed to address the state tax treatment of Roth contributions, which are made on a post-tax basis for federal tax purposes. KPERS-KPERS 457 Data. This amendment to K.S.A b10 would provide for KPERS member data, such as projected pension benefits, to be shared with the KPERS 457 plan to benefit KPERS 457 participant retirement income planning. KPERS funds administrative expenses for the KPERS 457 plan from a fee paid by participants in the form of a 0.04% assessment on assets held in KPERS 457 plan accounts. No change in this assessment would be needed for any administrative costs associated with this bill. Contents amended into HB 2489 by, and subsequently into House Substitute for SB of 24

11 House Bill 2542 HB 2542 would provide an ad hoc cost of living adjustment (COLA) for retirees who have been retired for at least 5 years as of July 1, The COLA is structured to provide the following increases: Years Since Retirement Amount of ad hoc COLA* 0-5 years No Adjustment 5-10 years 1.0% increase years 2.0% increase 15 or more years 3.0% increase *Increases in the monthly benefit due to the cost of living adjustment cannot exceed $150. KPERS consulting actuary completed a cost study on HB 2542 and projected the unfunded actuarial liability would increase by $131.2 million for all KPERS retirement plans. HB 2542 does not specify the length of the amortization period to fund the cost of living adjustment. The actuary looked at two amortization options: amortizing over 15 years and amortizing over the remainder of the existing unfunded actuarial liability amortization period (17 years). Under a 15-year amortization period, HB 2542 is projected to cost $11.72 million in FY 2017 ($8.96 million from all funds in State contributions) and $12.18 million in FY 2018 ($9.32 million from all funds in State contributions). Under a 17-year amortization, the projected first-year cost is $10.7 million ($8.19 all State funds) and $11.2 million in the second year ($8.52 all State funds). 11 of 24

12 House Bill 2653 HB 2653 makes several amendments relating to working after retirement rules for KPERS retirees. These amendments revise rules enacted in 2015 Senate Substitute for HB 2095 with respect to returning to work for a different employer, the process for extending certain exemptions to the basic working after retirement rules, and removing the expiration of special rules for certain school retirees. Returning to work for a different employer Prior to passage of 2015 Senate Substitute for HB 2095 (2015 HB 2095), KPERS retirees returning to work for a KPERS-affiliated employer other than the employer for which they worked during their last two years before retirement (different employer) have not had a limit on their earnings. The employers have been required to pay the actuarially required rate, plus the employee contribution rate of 6% on the retirees compensation. Effective July 1, 2016, 2015 HB 2095 established a new basic working after retirement rule that increased the earnings limit to $25,000, and extended it to KPERS retirees working for any KPERS employer, eliminating the difference between the same employer and different employer. Under HB 2653, the distinction between same and different employer would be reinstated. KPERS retirees returning to work for a different employer would not be subject to an earnings limit, and an employer contribution rate of 30% would be applied to their compensation. Assurance protocol 2015 HB 2095 established several exemptions from the basic working after retirement rule, including three that were time-limited: a one-year exemption for hardship positions and exemptions of up to three years (or three school years, whichever is less) for retirees employed in special education or hard-to-fill positions (as identified by the Kansas Board of Education). The 2015 legislation also permitted a one-year extension for these exemptions if approved by the Joint Committee on Pensions and Benefits (Joint Committee). HB 2653 would remove the requirement that the Joint Committee approve extension applications. Instead, it establishes provisions for a written assurance protocol, which is to be submitted to KPERS. The assurance protocol is to be signed by the superintendent and board president for school districts, or for municipalities, the governing body or a designee. The assurance protocol must state that the position was advertised on multiple platforms for at least 30 calendar days and must identify one of three conditions listed in HB 2653 (1) no applications were submitted for the position for which an extension of an exemption is sought; (2) none of the applicants met the reference screening criteria of the employer; or (3) no applicant possessed the appropriate licensure, certification or other necessary credentials. HB 2653 retains provisions in 2015 HB 2095 authorizing the Joint Committee to request and review documentation of employers attempts to fill positions covered by an exemption with a permanent, active employee, as well as authority for the Joint Committee to revoke an exemption in instances where the conditions are not met. Extension of certain grandfathered provisions Since 2009, KPERS retirees who are employed in a licensed school professional position have been exempt from any earnings limitation, whether employed by the same or a different employer than the one from which they retired. The employer has been required to pay the 12 of 24

13 House Bill 2653 actuarial contribution rate, plus 8% HB 2095 does not continue this particular exemption, except that, through July 1, 2017, it grandfathered all KPERS retirees employed in a licensed school position who had retired on or before May 1, After July 1, 2017, those grandfathered retirees will then be subject to a $25,000 annual earnings limit while working after retirement for a KPERS employer (unless they are employed in a position qualifying for a hardship, special education, or hard-to-fill exemption). As introduced, HB 2653 would eliminate the July 1, 2017, sunset and indefinitely extend the grandfathered status for these retirees. HB 2653 would, in some instances, increase employer working after retirement contribution rates as outlined below: Rate if returning to work for a different employer Under 2015 HB 2095, employers who hire a KPERS retiree who retired from a different employer would pay the statutory employer contribution rate for active members. In FY 2017, that rate would be 10.81% for State/School Group employers and 9.18% for Local Group employers. Under HB 2653, the rate would be fixed at 30%. Rate for grandfathered licensed school professionals: Currently, school employers that hire KPERS retirees in licensed school professional positions pay the actuarial employer contribution rate, plus 8%. (24.03% in FY 2017) That rate structure would continue indefinitely for grandfathered retirees in licensed positions (retirees with retirement dates before May 1, 2015). If the grandfathering provisions were to sunset after June 30, 2017, as currently provided under 2015 HB 2095, and the retirees continued working (under the new $25,000 earnings limit), the employer contribution rate for those retirees would drop to the statutory employer contribution rate (12.01% in FY 2018). To the extent that the ability to work for a different employer without an earnings limit retains the incentive to retire earlier than a member might otherwise, there is likely to be an actuarial impact on the plan. However, KPERS is not able to accurately anticipate the extent to which these new rules would impact working after retirement patterns, and therefore cannot estimate how the rate changes may impact actuarial liabilities or expected revenues into the KPERS trust fund. Portions of HB 2653 were amended into HB 2700, and in modified form, into House Substitute for SB of 24

14 House Bill 2654 HB 2654 creates a new exemption from the working after retirement rules in K.S.A Any retiree who is licensed by the board of nursing or the board of healing arts and employed by a hospital or county health department would be allowed to return to work without an earnings limitation while also receiving their retirement benefit. Employers hiring these retirees would be required to contribute the actuarial required contribution rate plus the statutory employee contribution rate. For FY 2017, the required employer contribution for rehiring retirees in these positions would total 16.77% for State employers and 15.18% for Local employers. KPERS has only limited data available about the number of active employees hired by state hospitals in these types of professions and no data about the number of licensed health professionals employed by other hospitals and county health departments. Moreover, that type of data does not provide any indications about the extent to which the proposed exemption would be used by eligible employees and retirees. Generally, working after retirement policies that could incent members to retire at a younger age would have an actuarial cost to the System. The required employer contribution on the retiree payroll would offset the actuarial cost to a certain extent, but it is not possible to calculate the precise costs. 14 of 24

15 House Bill 2656 HB 2656 creates a new exemption from the working after retirement rules in K.S.A Any retiree who retired at or after age 62 and who is subsequently employed by a school district in a position that requires a license under K.S.A would be exempt from any earnings limitation while receiving their retirement benefit and working for a school district. The employing school district would be required to contribute the full actuarial required contribution rate plus 8%. For FY 2017, that rate totals 24.03%. Under 2015 HB 2095, employers who hire a KPERS retiree who would pay the statutory employer contribution rate for active members, unless the retiree is hired under an exemption from the earnings limitation or has grandfathered status under 2015 HB In FY 2017, that rate would be 10.81% for State/School Group employers. Under HB 2653, employers using the new earnings limit exemption for age 62+ retirees would pay the actuarial rate plus 8% (24.03% in FY 2017 for School employers). Generally, working after retirement policies that could incent members to retire at a younger age would have an actuarial cost to the System. The ability to work without an earnings limit if retiring at or after age 62 may encourage some members to delay retirement until age 62 which would have a positive actuarial impact on the System. At the same time, HB 2656 would create an incentive to retire at age 62 for members who may otherwise have retired later, with a corresponding actuarial cost to the plan. Therefore, KPERS is not able to anticipate the net actuarial impact of the age 62 exemption on working after retirement patterns. The required employer contribution on the retiree payroll would offset the actuarial cost to a certain extent, but it is unclear whether the actuarial rate plus 8% is sufficient to cover the increased liability of any change in retirement patterns. As a result, there is also likely to be a long-term cost associated with changes in retirement patterns and behaviors, but it is not possible to calculate the precise costs or to estimate how the rate changes may impact expected revenues into the KPERS trust fund. The policy changes in HB 2656 have been amended into HB of 24

16 House Bill 2675 HB 2675 would create the Kansas efficiency fund, the Kansas rainy day fund and the sales tax on food rate reduction fund. The Kansas efficiency fund and Kansas rainy day fund are to be trust funds and managed and administered by the Board of Trustees of KPERS. As written, the bill would require the chairperson of the Board of Trustees or the chairperson s designee to approve all vouchers for payments from the funds. The bill also appropriates the Kansas efficiency fund and Kansas rainy day fund in KPERS to enable KPERS to pay for administration of the new funds. The language in the bill as introduced does not provide clear parameters or mechanisms for KPERS administration and investment of these trust funds. Representatives Helgerson and Trimmer House Committee on Appropriations Administration of two new trust funds would require additional administrative costs, but the exact amount cannot be calculated at this time. Depending on the reporting requirements of the new funds, additional staffing and administrative resources may be necessary to fully comply with all requirements. However, each trust fund that is administered by KPERS can only be used for the express purposes of the trust fund. Any new costs incurred from administration of the new funds would be paid by the appropriate trust fund. No new expenditures from existing trust funds would be required. 16 of 24

17 House Bill 2700, As Amended by House Committee HB 2700, as amended by the, would make several changes to existing working after retirement policy, including: Requiring members to sign an affirmation on their application for retirement that they will not be employed with any participating employer within 60 days of retirement and that they have no prearrangement to return to work with any KPERS affiliated employer. At the point of rehiring a KPERS retiree, the employer s appointing authority would have to sign an affirmation that the retiree has not been employed by the participating employer within 60 days of the retirement and that there was no prearranged agreement for employment. If a member is found to have entered into a prearranged agreement to return to work before retirement, 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; Extend from July 1, 2017, to July 1, 2020, the grandfather provisions for those retirees in a licensed school professional position who had retired before May 1, 2015; Establish an assurance protocol to allow employers to meet a set of criteria to extend a hardship, hard-to-fill or special education position rather than obtaining approval from the Joint Committee on Pensions, Investments, and Benefits (HB 2653); Allow for employers to extend a hardship position for up to three 1-year extensions; Clarify that a 48-month or 4-school year (whichever is less) limit applies to total time worked by a retiree for any combination of positions under hardship, hardto-fill, and special education exemptions; Create a new exemption from the general working after retirement rule ($25,000 earnings limit, employer contributes statutory rate) for retirees who retired at age 62 or later and are employed in a licensed school position. (HB 2656); Establish a 30% employer contribution rate for retirees working in positions that are exempt from the general working after retirement rules (hardship, hard-to-fill, special education, age 62); Increase the annual earnings cap for KP&F retirees from $15,000 to $25,000, matching the KPERS earnings limit. House Committee on Taxation House Floor The policy changes contained in HB 2700 have the potential to affect retirement decisions of KPERS members. If a member is able to retire and receive both a pension and a salary from a KPERS employer, they may decide that it is in their best financial interest to retire at a younger age than they may have otherwise retired. Generally, working after retirement policies that could incent members to retire at a younger age would have an actuarial cost to the System. The ability to work without an 17 of 24

18 House Bill 2700, As Amended by House Committee earnings limit if retiring at or after age 62 may encourage some members to delay retirement until age 62 which would have a positive actuarial impact on the System. At the same time, HB 2656 would create an incentive to retire at age 62 for members who may otherwise have retired later, with a corresponding actuarial cost to the plan. Therefore, KPERS is not able to anticipate the net actuarial impact of the age 62 exemption on working after retirement patterns. The requirement of a 30% employer contribution rate on retiree payroll would offset the actuarial cost to a certain extent. In addition, if employers require rehired retirees to reduce their negotiated salary due to the 30% contribution rate there may be retirees who decide the costs outweigh the potential benefit. Requiring employers and retirees to sign a document that there has been no prearranged agreement to return to work could also reduce the number of members who decide to retire and return to work. However, because these policies affect member behavior, the exact costs cannot be calculated. Likewise, the actuarial impact from an earnings limit increase for KP&F retirees returning to work for the same employer cannot be calculated. KP&F retirees generally are eligible to retire with full benefits at younger ages than KPERS members, and therefore, may be able to return to work while earning benefits for longer periods of time. However, it is common for KP&F retirees to return to work in a covered position for a state, school or local employer affiliated with KPERS. In these cases, the retiree is enrolled as a new member of KPERS and begins contributing and earning a new benefit under KPERS, while receiving KP&F retirement benefits without any limitation on earnings. As a result, retirement incentives for KP&F members may be affected less by the earnings limit on returning to work for the same employer than opportunities to work in a KPERS-covered position. HB 2700 was amended by the House Pensions and Benefits Committee to include provisions from HB 2653 and HB The contents of HB 2700 were amended into House Substitute for SB 168, but not all portions remained in H Sub for SB 168 as enacted. 18 of 24

19 House Bill 2710 HB 2710 would add officers of the Kansas Bureau of Investigation to the list of KP&F members eligible to participate in the Deferred Retirement Option Program (DROP) that was passed by the 2015 Legislature. As originally enacted, the DROP plan applies only to KP&F members employed by the Kansas Highway Patrol, and any cost resulting from the plan is absorbed by all KP&F employers. House Committee on Appropriations KPERS consulting actuary completed a cost analysis of adding additional KP&F members to the number eligible to participate in the DROP. Because the Kansas Bureau of Investigation officers make up such a small percentage (about 1%) of the total KP&F population and the cost of the DROP is spread across all KP&F employers, the actuary estimates that HB 2710 will not have significant enough costs to change the existing employer contribution rate. However, it should be noted that it is not possible to anticipate how individual member behavior might change due to the new DROP. Any future costs that arise due to changes in behavior would be reflected in future actuarial required contribution rates. 19 of 24

20 House Bill 2725 HB 2725 changes the way certain payments are used in calculating a KPERS member s final average salary at retirement, implements a new cap on the amount of annual leave that can be accrued by KPERS members, and eliminates sick leave payouts at retirement for state employees who have not accumulated 800 hours of sick leave by July 1, Vacation leave accrual. HB 2725 establishes a hard cap of 240 hours on the amount of vacation time that can be accrued by any KPERS member. Members above the 240-hour cap on July 1, 2016, would be able to use their accrued vacation leave, but could not accumulate any additional vacation leave so long as the balance remains above 240 hours. State employee sick leave payouts. HB 2725 amends the statute providing for payment at retirement of a portion of sick leave accumulated by state employees (both classified and unclassified). State employees must have accumulated at least 800 hours of sick leave to be eligible for such payments. HB 2725 would limit sick leave payouts at retirement to those state employees who had accrued 800 hours of sick leave as of July 1, If a member has accumulated less than 800 hours on July 1, 2016, they would never be eligible for a payment of unused sick leave. Final average salary calculations. HB 2725 limits the inclusion of payouts in final average salary of members with membership dates before July 1, 1993 in several respects. By virtue of limiting vacation leave accrual, lesser amounts of vacation leave would be available for payment at retirement. o For purposes of calculating final average salary for pre-1993 members, any accumulated vacation leave as of July 1, 2016, that is in excess of 240 hours could be included in compensation at retirement. Likewise, fewer state employees would be eligible to be paid for a portion of their accumulated sick leave at retirement. Those eligible would effectively become a closed group. For a pre-1993 member s final average salary calculation, HB 2725 also caps sick leave at the amount accrued on July 1, Members could accumulate and use additional sick time, but the amount accrued after July 1, 2016, could not be counted as add-on pay for purposes of calculating final average salary. Finally, while the intent of this language is not clear, HB 2725 appears to limit the use of add-ons for purposes of calculating final average salary to only those that were earned within the last four years of retirement. This provision could be read as applying to all forms of add-on pay, not just vacation and sick leave payouts at retirement. In addition to limiting the amount of accumulated leave used in determining the final average salary for pre-1993 members, HB 2725 would limit the pay rate that could be used in determining the value of accrued leave. o Members would continue to be paid at retirement for the accrued vacation and sick leave based on their current pay rate in accordance with the employer s policies. o However, for purposes of valuing the vacation and sick leave used in calculating final average pay, the member s pay rate as of July 1, 2016, is to be used. 20 of 24

21 House Bill (f) payments. HB 2725 would preclude any payments made to a KPERS member on or after July 1, 2016, under a 457(f) plan from being considered as compensation for purposes of figuring a members final average salary. The Kansas Police and Firemen s Retirement System (KP&F) is expressly excluded from the provisions of HB 2725 as they relate to final average salary calculations and vacation leave accrual caps. However, state KP&F members may be affected by the provisions closing the payouts for sick leave at retirement. House Committee on Appropriations House Committee on Appropriations Payout provisions. The provisions which allow for the use of a 4-year final average salary by pre-1993 members currently are included in the actuarial assumptions. This benefit provision, like the rest of the KPERS System, is designed to be pre-funded. By limiting the use and value of vacation and sick leave and other add-ons, HB 2725 would be expected to reduce benefits for some pre-1993 members, and therefore, would tend to reduce KPERS s liabilities. However, KPERS does not have any data regarding members existing vacation and sick leave balances or other add-ons or the point at which they were earned. Therefore, it is not possible to project the actuarial impact of HB Some context can be provided by projecting the impact of eliminating use of vacation and sick leave payouts in final average salary calculations for pre-1993 KPERS members. Based on the 12/31/2014 actuarial valuation, KPERS consulting actuary completed an actuarial cost study evaluating the impact of completely eliminating the use of add-ons in the final average salary calculation. Totally eliminating use of sick and annual leave was projected to reduce the unfunded actuarial liability (UAL) for KPERS by 0.06% ($52 million). A reduction in contribution rates of 0.19% for the State Group, 0.05% for the School Group, and 0.10% for the Local Group was projected. Because HB 2725 would reduce, but not eliminate, add-ons for this closed group, the cost study clearly would overstate the actuarial impact of HB Moreover, the cost study is based on data that is more than a year old, and due to retirements from this group in the interim, would overstate the impact of such a change. A reduction in actuarial required contribution rates would ultimately result in fewer contributions entering the KPERS Trust Fund. However, because the State/School Group statutory employer contribution rate is below the actuarial required contribution rate, only the Local Group reduction would result in reduced contributions through the next several fiscal years. In both cases, the reduced revenue reflects lower employer contributions required to fund benefits for pre-1993 members. However, HB 2725 would not be expected to result in savings of the amount projected by the cost study, and therefore, the contribution rates would not decline to the extent described above. Elimination of 457(f) payments from final average salary. Due to the highly infrequent nature (2 over the last 20 years, 90,000 retirements) of 457(f) payments and the limitations of their 21 of 24

22 House Bill 2725 impact due to IRS compensation caps and the KPERS cap law, no material actuarial impact would be expected if such payments were to be excluded from final average pay calculations. 22 of 24

23 Senate Bill 463 SB 463, as it pertains to KPERS, would eliminate the Expanded Lottery Act Revenues Fund. Currently, a portion of the KPERS-School employer contributions are paid from the Expanded Lottery Act Revenues Fund. Senate Committee on Ways and Means Senate Committee on Ways and Means As initially passed, K.S.A stated that after an initial transfer, 50% of the proceeds from the Expanded Lottery Act Revenues Fund were to be transferred to the KPERS Trust Fund for the purpose of paying the unfunded actuarial liability until the System as a whole was 80% funded. It was anticipated at the time that this would be an additional payment, beyond regular employer contributions. In practice, the Expanded Lottery Act Revenues Fund payment has been used as a portion of the KPERS-School employer contribution, rather than an additional payment. If the Expanded Lottery Act Revenues Fund were to be abolished, it would have no practical effect on KPERS funding as the law is currently being applied. 23 of 24

24 Senate Bill 498 Current statutes regarding the sale of surplus state assets (K.S.A ) require that the first 20% of revenue go to the agency that owned the surplus asset and the remaining 80% is to be deposited into the KPERS Trust Fund to pay down the unfunded actuarial liability. SB 498 creates a process for reviewing state assets and establishing which assets would be considered surplus. Any assets sold under this review process would be exempt from K.S.A , and the Trust Fund would not receive any of the proceeds from the sales. Senate Committee on Ways and Means Senate Committee on Ways and Means Since the policy of depositing 80% of the proceeds from the sale of surplus state assets went into effect in July 2012, KPERS has received about $1.3 million in total. The changes proposed in SB 498 would decrease the amount of funds received by the Trust Fund in the future, but it is not possible to estimate the size of the effect. 24 of 24