KPERS—Cost of Living Adjustments

The majority of Kansas Public Employees Retirement System (KPERS) pension plans are defined benefit plans, which provide a fixed, pre-established benefit for members at retirement.

Economic Changes

The value of fixed benefits can decrease over time due to changes in the economy, like inflation. The longer a retiree or beneficiary lives in retirement, the greater the effect inflation will have on how much purchasing power those benefits have.

In 2002, the average annual retirement benefit was about $10,000. The average annual inflation in the Consumer Price Index (CPI)–Urban over the 20 years since then is about 2.5 percent. The purchasing power of that $10,000 benefit is about $6,100 in 2022.

Cost-of-living Adjustments

Cost-of-living adjustments (COLAs) modify benefits to counteract the impact of economic changes like inflation. COLAs can be implemented either automatically or on an ad hoc basis.

Automatic adjustments occur on a regular, predetermined schedule and do not require additional action by the plan sponsor. These adjustments can be tied to an index, such as the CPI, or conditioned on investment performance or funding level.

In contrast, ad hoc adjustments do not occur on a regular basis and require approval of the plan sponsor or a delegating authority. In Kansas, that authority resides within the Legislature.

In June 2022, the National Association of State Retirement Administrators reviewed 100 public pension plans and found that 72 plans included an automatic COLA of some sort, while the remaining 28, including KPERS, had utilized ad hoc adjustments before.

COLAs in Kansas

KPERS plans have not included a COLA since the system was created, with three exceptions:

• KPERS 2 included an automatic 2.0 percent COLA when it was created in 2007, but the authorizing statute was repealed in 2012.
• KPERS 3 has a self-funded COLA of 1.0 or 2.0 percent, but that benefit is funded by the member through an actuarial reduction to the member’s lifetime benefit.
• A 13th check benefit was paid to members from 1980 to 1987.

In total, the Legislature has approved both permanent and one-time ad hoc COLAs. The Legislature has not approved a COLA since 2008.As of the December 31, 2021, valuation, 11,261 members (10.0 percent of beneficiaries) met the criteria to receive at least one COLA since they retired. The remaining 90.0 percent have never received a COLA.

Cost and Funding of COLAs

The projected costs of implementing a COLA depends on the characteristics of the adjustment—automatic or ad hoc, one-time payment or permanent adjustment, base or compound adjustment, and so on.

When a COLA is approved, costs are funded through current employee or employer contributions. COLAs can be funded through a one-time payment equal to the change in the unfunded actuarial liability (UAL), or the cost can be amortized over a number of years.

During the 2022 Session, several bills to implement a COLA were introduced to both the House and Senate. Those bills would have implemented a COLA in a variety of ways:

Automatic COLAs

One actuarial analysis estimated that a 2.0 percent automatic, compounding COLA would increase liabilities by 16.0 percent. Applied to KPERS, this would cost $5.5 billion to implement.

For example, 2022 HB 2583 and SB 401 would have implemented an automatic COLA for all retirees starting June 30, 2022. COLA increases would be tied to the CPI, ranging from no COLA, if the CPI increase was lower than 0.04 percent, to a 5.0 percent COLA, if the CPI increase was 3.5 percent or greater.

The projected cost for the bill was a $4.9 billion increase in the UAL. If funded over a 20-year period, the projected average annual cost would have been about $500.0 million.

Ad Hoc COLAs

According to the KPERS consulting actuary, the projected cost of a single ad hoc permanent adjustment of 3.0 percent based on the December 2021 valuation would total $545.9 million.

For example, 2022 HB 2584 and SB 402 would have provided a single, permanent adjustment for retirees before July 1, 2017. The adjustment would have been tiered from 1.0 to 5.0 percent, depending on how long the member had been retired. The projected increase in the UAL was $317.4 million. If funded over a 15-year period, the average annual cost would have been approximately $36.0 million.

13th Check

HB 2742 (2022) would have issued a one-time 13th check payment to retirees on or before July 1, 2022. The projected cost was $142.4 million.