Kansas City’s Continuing Fight for Pension Sustainability

Kansas City continues its mighty struggle to save its children and future offspring from the possible ravages of  pension-induced bankruptcy. The city has commissioned, for this purpose, its Pension System Task Force. In a recent Kansas City Star editorial, the paper notes, with healthy skepticism, the appearance of defined benefit proponent Hank Kim before the task force. According to the authors, Mr. Kim strikes a rather glib pose when addressing the issue:

While many states and cities are altering their defined benefit plans because of money woes, Kim doesn’t sound that worried.

•Kansas City task force chairman Herb Kohn has said the city should aim to have its pension systems funded at 90 to 100 percent. As of 2010, though, three systems were under 80 percent, a far cry from the 96 percent average in 2002.

Kim isn’t nearly that aggressive.

In May, when talking about the 78 percent funding average for state pension plans, Kim said that “78 percent is a number we’re very comfortable with.” In fact, he has indicated that a 70 percent level is fine, too, because Fitch Ratings considers that adequate.

Counterpoint: The Government Accountability Office calls for at least an 80 percent funding level. So do many pension managers.

Kansas City taxpayers deserve honest answers to a host of questions, not least of which is whether the city’s pension managers have adopted a reasonable discount rate in determining the current funding levels needed to sustain future payouts to retirees and their families. In today’s uncertain financial environment, is an 80 percent funded level benchmark reasonable? Should the pension systems continue to assume historical market return averages of 8 percent when determining current funding levels? If one were to substitute a more reasonable rate, given market performance over the last decade, of say 4 percent, then the degree to which the systems are currently underfunded grows.

Our children deserve our immediate attention to this matter. Missouri currently has approximately 130 state and local public pension plans.  What assurances are there that these are solvent in the mid- to long-term? Of course, one may counter, the systems are audited under the law. But so was Enron!

You may trust, but first verify.