Brief ⁽¹⁾

Sub. for HB 2718 would establish a defined contribution retirement plan as an option for newly hired employees who go to work for a public employer affiliated with the Kansas Public Employees Retirement System (KPERS). Beginning July 1, 2001, employees hired by a KPERS participating employer would be offered an election to choose either the traditional KPERS defined benefit plan currently covering state, school, and local employees, or as an alternative, a new defined contribution plan. The new option would not be offered to public employees currently covered by the regular KPERS defined benefit plan or in their year of waiting. The option would not be offered to employees of a participating employer offering membership in the Kansas Police and Fireman (KP&F), Judges, or Regents 403(b) retirement plans.

The new plan would offer retirement and death benefits through the purchase of annuities and mutual fund investments, as well as other financial retirement products that would be self-directed by members. Public employees selecting the defined contribution option also would be enrolled in the employer-paid KPERS death and long-term disability benefits plan. The vesting period for the new plan would be ten years, the same period of waiting for the regular KPERS defined benefit plan. During the waiting period, participants in the defined contribution plan would not be able to take the employer contributions if they leave their position.

In selecting between the defined benefit and defined contribution plans, a one-time irrevocable election would be offered within the first 60 days of employment to new hires working for a KPERS participating employer. Coverage in the new defined contribution plan is effective immediately after the election is recorded. Current law allows school employees what is termed "first-day" membership in KPERS, but other state and local employees have a waiting period of one year before becoming members of KPERS for the purpose of retirement. Among those future public employees who could elect the new defined contribution plan would be those going to work for a KPERS participating employer, including most state personnel, Regents classified staff, school district employees, community college personnel, local governmental employees, and employees of other participating governmental and nongovernmental entities. Those state and local employees eligible for membership in the KP&F and the Retirement System for Judges would not be eligible to join the new plan. Unclassified employees at Regents institutions and others eligible to participate in 403(b) retirement plans also would not be eligible.

Members of the new plan would be required to contribute 4.0 percent of gross compensation, the same rate required of all other KPERS covered employees in a defined benefit plan. Participating employers would contribute at the same rate for the new plan as would be determined for the employer contributions paid into the KPERS defined benefit plan. The state would contribute an amount that would be equal to the KPERS defined benefits contribution required for a particular year (3.59 percent in FY 2000 for the retirement contribution and 0.6 percent for KPERS insurance). For a group of correctional employees, the state's contribution rates are higher than for regular KPERS members. For local units of government, the contribution rate for participating employers would be lower than the state's rates. In CY 2000, the local rate is 2.62 percent for the retirement benefit contribution and 0.6 percent for the KPERS insurance contribution.

The KPERS Board of Trustees would be the administrator of the new plan. The bill would direct the KPERS Board to select at least four but not more than eight service providers from which retirement products are available. At least one company would have to be from Kansas. The funds invested for members of the new plan would be self-directed. The KPERS Board of Trustees would be instructed to develop and maintain personal contact information for active members. The KPERS Board would be expected to make available, or to have its third party administrators to make available, both educational and informational materials to members. The Joint Committee on Pensions, Investments and Benefits would be given oversight responsibilities to monitor the new plan and services provided.

The bill would be effective upon publication on July 1, 2000, and the effective date for implementing the new defined contribution plan would be July 1, 2001, for the provisions to take effect.

Background

The Kansas 2000 Select Committee reviewed proposed defined contribution plans during the 1999 and 2000 Sessions. A subcommittee also was appointed to review the subject during the 1999 Session and 2000 Session. Last year, the Committee recommended introduction of several bills (HB 2666, HB 2667, and HB 2668) that would have implemented a defined contribution plan for various groups of public employees. A subsequent bill sponsored by Representative Carmody and others concerning defined contributions was introduced during the 2000 Session and became the focus of the Committee's review this year.

Testimony on HB 2718, as introduced, focused on the proposed defined contribution plan. Among the conferees heard by the Committee and appearing as proponents were Representative Tim Carmody and Representative Phill Kline, as well as representatives from the Governor's Office, the Kansas Public Policy Institute, Security Benefit Group, and Fidelity Investment Company. Opponents included representatives from the Kansas Association of Public Employees and the State Employees Association of Kansas. Conferees who asked to be identified as neutral included the Vice Chairperson of the KPERS Board of Trustees and the KPERS actuary.

The bill as introduced would establish a defined contribution retirement plan for public employees as an option within KPERS. Under the original bill, a one-time irrevocable election would be offered to present members of KPERS. The final date for an election to the new plan would be October 1, 2001. Among those public employees who would be eligible are those presently working for a KPERS participating employer and who are KPERS members, including most state personnel, school district employees, community college employees, Regents classified staff, local public employees, and certain employees of statutorily designated nongovernmental entities. Any KPERS member who elected the new defined contribution plan would have the KPERS defined benefits frozen as of July 1, 2001. An actuarial calculation of the present value of the individual's KPERS benefits would be made to determine the basis of transferring holdings to the new plan and the individual's account. Members of KPERS who do not elect to join the new plan would remain members under the KPERS defined benefits plan.

Under the bill as introduced, new employees hired after July 1, 2001, would be required to participate in the new KPERS defined contribution plan. Under provisions of the bill, they would not be allowed to join the KPERS defined benefits plan. Members of the new plan would be required to contribute 4.0 percent of gross compensation. The state would contribute an amount that would be equal to the KPERS defined benefits contribution required for a particular year (3.59 percent in FY 2000) and that might be reduced by an amount necessary to mitigate the negative financial impact, if any, on the KPERS defined benefits plan resulting from conversions to the new defined contribution plan. Members who participate in the new defined contribution plan would be vested immediately, and would be able to take all of the employer contribution with them if they left working for a participating employer.

Fiscal Note

As of March 20, 2000, a fiscal note has not been submitted by either KPERS or the Budget Director for the substitute bill. The KPERS actuary provided an assessment of the actuarial fiscal impact of HB 2718 as introduced. It was noted that the proposed defined contribution plan was not cost neutral and that an adjusted employer normal cost contribution rate for the present defined benefit plan would be required under provisions of HB 2718 as introduced. No assessment by the KPERS actuary is available for the substitute bill's provisions.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html