Kansas legislation targeting environmental, social, and governance criteria in public investments and contracts was held in House and Senate committees Wednesday as lawmakers work on changes after concerns were raised about projected big pension fund losses due to divestment.
Anti-ESG efforts have popped up in several state legislatures with bills seeking to protect certain industries, like fossil fuels, from “boycotts” by companies through government contract or investment prohibitions.
At legislative hearings on House Bill 2436 and Senate Bill 291, Alan Conroy, executive director of the Kansas Public Employees Retirement System (KPERS), said the measures could negate 10 years of pension funding progress.
Changed definitions for “fiduciary” in the bills would disqualify all of the pension fund’s current investment managers, forcing contract terminations and a divestment from positions they managed, he said.
The divestment is projected to result in about $1.14 billion in losses due to the early sale of assets from illiquid investments, while earnings from a restructured portfolio could fall by $3.6 billion over 10 years compared to the existing portfolio, lowering the $24.3 billion retirement system’s current 72% funded ratio to closer to 60%, according to Conroy.
The managers, he noted, would have to be dropped not because of what they are doing with KPERS’ funds, but because of their companies’ ESG activities in other areas.
“If companies are doing doing anything on ESG, maybe they’ve got an EGS newsletter, maybe they’ve given speeches on ESG, maybe they have an ESG fund for those customers that want to invest in ESG, not KPERS — if any of that is going on in those companies, then we think by this language we cannot do business with them,” he told the House Financial Institutions and Pensions Committee.
In a fiscal note on the House bill, Kansas Budget Director Adam Proffitt said an increase in KPERS’ unfunded liability would result in higher pension contributions by public employers.
“The KPERS actuary estimates for the state/school group lowering the expected return by 0.85% would increase the unfunded actuarial liability by $2.4 billion and reduce the funded ratio by 6%,” the note said. “With this scenario, the actuarial required employer contribution rate would increase in FY 2025 from 12.42% to 17.61%, or 5.19 percentage points.”
After hearing testimony before the Senate Federal and State Affairs Committee, Republican State Sen. Jeff Longbine said the legislation could potentially reverse the state’s “hard” work to raise the pension funding ratio.
“That wipes out $1.5 billion in bonding this legislature has done over the last 10 years, it wipes out a billion dollars we put into the fund last year, and would wipe out another billion dollars that we’re considering putting into KPERS this year,” he said.
S&P Global Ratings noted Kansas’ significant unfunded pension liabilities and its use of pension bonds when it revised the outlook on the state’s ratings to positive from stable last month, saying “a continued commitment to budget discipline in maintaining a structural balance in future budget years and consistent pension contributions that meet actuarial recommendations will be needed to achieve a higher rating.”
Representatives for Kansas teachers and public employee retirees also testified against the bills.
Conroy’s written testimony included several suggested amendments and the chairmen of both committees said more work will be done on the bills.
Proponents of the legislation include Kansas State Treasurer Steven Johnson, who said the legislation would address “various concerns regarding the utilization of ESG factors in state contracting and state investments to the detriment of taxpayer expense and the return on capital investments.”
Speaking before the House committee, Johnson said, “players in the financial sector have taken up the ESG charge, which can blur the line between advancing policy initiatives and measuring return risk.”
“When money managers choose their own policy initiatives, we must make sure our interests align with those interests as we move forward,” he added.
In written testimony, Kansas Attorney General Kris Kobach, who would be charged with enforcing the measures, said ESG-driven funds usually deliver a much lower return on investment to the detriment of state workers whose pensions are at stake.
“State-funded ESG investment policies should be illegal, and individual investors should be notified when their money is used to advance a political agenda,” he said. “This bill addresses that.”