Derek Schmidt calls for using surplus to pay down $1 billion in KPERS debt, saving millions in long run

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  • Derek Schmidt
    American politician
  • Laura Kelly
    48th and current governor of Kansas
Attorney General Derek Schmidt, the Republican frontrunner to challenge Gov. Laura Kelly, has budget recommendations for the legislative session. File photo.
Attorney General Derek Schmidt, the Republican frontrunner to challenge Gov. Laura Kelly, has budget recommendations for the legislative session. File photo.

Attorney General Derek Schmidt wants lawmakers to use much of a projected $2.9 billion surplus to pay down public debt while also targeting tax relief for Kansans.

Schmidt is calling for lawmakers to send $1 billion in cash — or more — to the Kansas Public Employees Retirement System.

"The bottom line is we have a rare and unprecedented opportunity to fix this long-term pension debt problem that's accumulated over a generation in Kansas, to shore up the system for current and future retirees, to wipe a huge chunk of expensive state debt off the books," Schmidt said in a phone interview with The Capital-Journal.

Schmidt's plan comes ahead of Monday's start to the 2022 legislative session. He is the Republican frontrunner to challenge Democratic Gov. Laura Kelly in this year's election.

Kelly is expected to release the details of her budget proposal Wednesday after delivering an in-person state of the state address Tuesday evening. In the past, Kelly's budgets have called for refinancing state pension liabilities — a move Republicans have strongly opposed.

Kansas lawmakers are in a somewhat unusual position this year as they debate what to do with a budget surplus instead of how to address a deficit.

Economists in November increased tax revenue projections for the fiscal year, forecasting a $2.9 billion surplus. The amount could grow, as revenues continue to beat predictions.

More: With $2.9 billion surplus, how will Kansas lawmakers spend your tax dollars or cut taxes this year?

"The KPERS investment obviously helps retirees present and future by improving their security. It helps taxpayers over the long term, because then there's not a requirement to put more future general tax money into the KPERS system, it reduces the amount that has to go in to pay off past obligations," Schmidt said.

"But it also, and this is the additional point, it also helps everybody who relies on any state service going forward, whether it's public schools, whether it's transportation, whether it's social services, whether it's corrections, because it frees up a significant amount of cash flow every year for the state general fund."

An assessment by KPERS, provided by Schmidt's campaign, determined that adding $1 billion by the end of the fiscal year "translates into improved funding immediately and reduced employer contributions in the coming years."

The proposal would save $75 million in state and school contributions next fiscal year, with $403 million in taxpayer savings over five years.

More: Kansas lawmakers should make these 7 issues top priorities during 2022 legislative session

The system's unfunded liability would drop from about $5 billion to about $4 billion, improving the funded ratio from about 77% to about 82%. The ratio measures a pension plan's assets as a percentage of liabilities.

KPERS officials said 80% is the short-term goal with 100% as the ultimate goal. While 80% is an oft-used funding target to determine the health of a pension plan, the American Academy of Actuaries has called it a myth.

For much of the 21st century, the ratio has been in the 40s and 50s, according to Federal Reserve data.

"There's no reason to deal with funny accounting," Schmidt said. "Just be straight up and honest, write the check, put it in the investment portfolio, pay off the debt, shore up the system."

Rainy day fund

Schmidt has urged caution with economic forecasts, recalling projected surpluses in 2008 prior to the Great Recession and impending budget cuts and tax hikes.

In addition to sending cash to KPERS, Schmidt is urging lawmakers to put money in a budget stabilization fund. He said he didn't have a specific dollar amount in mind, but suggested $500 million would suffice.

"The idea would be while there's cash in the bank, set it aside so that when the inevitable downturn comes, it's possible to cushion the blow and continue to meet our obligations," he said.

His experience as a top GOP lawmaker during the recession fuels the recommendation to put money away for a rainy day.

"When the bottom dropped out," Schmidt said, "suddenly there weren't cash reserves that could be used to cushion the blow to really critical state services like public school funding, like transportation investment, like social service costs."

More: COVID disaster spurs Gov. Laura Kelly to declare emergency as Kansas hospitals struggle

KPERS before tax cuts

When lawmakers start the 2022 legislative session Monday, they are bound to have competing ideas of how to spend the surplus or cut taxes.

"It's in some ways harder to budget in times when there's plenty of money than it is in times when there's lean money, because it's harder to say no to every good idea that comes along," Schmidt said. "And there are always more good ideas than there is cash available."

But he said thinks all other proposals should take a back seat to KPERS and the rainy day fund.

"They ought to be at the top of the list," he said. "I think they ought to try to do those two things first, before they get into the natural discussion about all the other competing priorities."

Both Schmidt and Kelly have called for cutting the state's food sales tax. Kelly's plan would eliminate the state's 6.5% tax on groceries entirely, which would cost the state about $450 million a year. Schmidt has backed the concept without specifying policy details.

The issue has long had bipartisan support but has been doomed when it's been bundled with less-popular proposals.

Gov. Kelly has advocated paying down debt

For her part, Kelly has also shown interest in paying down public debts. In November, her administration paid off a $300 million loan from Money Investment Board two years ahead of schedule. The bridge loan was used by the Legislature in 2017 to fill budget holes during former Gov. Sam Brownback's administration.

In a December interview, Kelly indicated she wanted to use some of the current surplus to pay off debt.

"You turn to things like paying down debt," she said. "Get debt off the books as much as you possibly can because then that frees up state general funds in the years going forward. So look for that."

However, the KPERS re-amortization plan she has proposed in past years would add to the long-term debt. The governor is expected to unveil her budget proposals this week, and it is unclear if it will again be included.

"Re-amortization," Schmidt said, "is one of those mind-numbing words that puts people to sleep so they don't notice what the real proposal is. It's just borrow more money so that we don't have to pay the bills until it's somebody else's watch. And I think that's both irresponsible, but also incredibly expensive."

Jason Tidd is a statehouse reporter for the Topeka Capital-Journal. He can be reached by email at jtidd@gannett.com. Follow him on Twitter @Jason_Tidd.

This article originally appeared on Topeka Capital-Journal: Should Kansas use budget surplus to pay off $1B in KPERS public debt?

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