Division of the Budget
Landon State Office Building Phone: (785) 296-2436
900 SW Jackson Street, Room 504 adam.c.proffitt@ks.gov
Topeka, KS 66612 http://budget.kansas.gov
Adam Proffitt, Director Laura Kelly, Governor
Division of the Budget
March 7, 2023
The Honorable Nick Hoheisel, Chairperson
House Committee on Financial Institutions and Pensions
300 SW 10th Avenue, Room 582-N
Topeka, Kansas 66612
Dear Representative Hoheisel:
SUBJECT: Fiscal Note for HB 2436 by House Committee on Appropriations
In accordance with KSA 75-3715a, the following fiscal note concerning HB 2436 is
respectfully submitted to your committee.
HB 2436 would prohibit any state agency, including the Pooled Money Investment Board
(PMIB), or any instrumentality of the state from adopting any procurement regulation that would
cause a bidder or contactor to be given preferential treatment or be subject to discrimination based
on environmental, social and governance (ESG) criteria, unless allowed by law.
The bill would specify that all KPERS investment personnel, including contractors, would
be subject to the same fiduciary duties as the KPERS Board of Trustees. A fiduciary could only
consider financial factors when discharging duties of the position. All shares held directly or
indirectly by KPERS could only be voted in the financial interest of KPERS beneficiaries. Unless
no economically practicable alternative would be available, KPERS would be required to:
1. Not grant proxy voting authority to any person who is not part of KPERS, unless the person
commits in writing to follow guidelines that match KPERS obligation to act solely upon
financial factors;
2. Give preference to a proxy advisor service that commits in writing to engage in voting
shares and make recommendations in a strictly fiduciary manner, without consideration of
policy objectives that are not the express policy objectives of KPERS;
3. Not entrust assets to a fiduciary, unless the fiduciary commits in writing to following
KPERS guidelines when engaging with portfolio companies to act solely upon financial
factors and not policy considerations that are not the express policy objectives of KPERS; The Honorable Nick Hoheisel, Chairperson
Page 2—HB 2436
4. Have no investment manager or contractor adopt a practice of following the
recommendations of a proxy advisor unless the advisor or proxy service provider commits
in writing to follow KPERS obligation to act solely upon financial factors; and
5. Tabulate and report annually all proxy votes to the Legislative Coordinating Council,
including a vote caption, the KPERS vote, the recommendation of any proxy advisor
recommendation which would be posted on the KPERS website for review by the public.
No state agency could share or publish information, adopt policies, rules or regulations, or
issue guidelines for ESG criteria that would restrict the ability of any industry to offer products or
services. No state agency could require any person or business to adopt or operate in accordance
with ESG criteria. The Attorney General would enforce any infractions of the provisions of the
bill. In addition to any other remedies available, an investment manager or contractor of KPERS
that services as a fiduciary and violates provisions of the bill would be obligated to pay damages
to the state in the amount equal to three times all funds paid to the investment manager or contactor
by KPERS.
Under current law, no KPERS funds can be invested or reinvested if the sole or primary
investment objective is for economic development or social purposes or objectives. HB 2436
would prohibit any funds being invested or reinvested if an investment objective is for economic
development or social purposes or objectives.
The enactment of HB 2436 would require additional oversight of investment managers and
additional reporting requirements. The agency would need to hire an additional 1.00 FTE
Investment Officer for these additional duties at a cost of $165,000 in FY 2024 (including fringe
benefits) from the KPERS Fund. In addition, the agency reports that KPERS utilizes more than
99,000 proxy votes each year. To manage these votes, the agency would need to utilize a proxy
voting vendor, at an estimated annual cost of approximately $750,000 from the KPERS Fund.
Both the cost of the additional FTE position and the contract for the proxy voting vendor would
be ongoing annual costs.
KPERS reports that the bill could have an actuarial cost to the retirement system from how
the divestment requirements would affect the KPERS assets and future expected investment
returns. The agency indicates that the KPERS investment portfolio would have to be restructured
because the current investment managers would be disqualified as fiduciaries and replaced by
alternative investment managers that would meet the bill’s requirements. The initial divestment
in private markets is estimated to cost KPERS approximately $1.14 billion from early divestment
and could lower the system’s funded ratio by 4.0 percent.
In addition, a theoretical restructured investment portfolio of 60.0 percent equities and 40.0
percent bonds would lower expected investment returns by 0.85 percent. This lowered investment
return would increase the liabilities of the system, which would increase the unfunded actuarial
liability and require increased employer contribution rates. The KPERS actuary estimates for the
State/School Group, lowering the expected return by 0.85 percent would increase the unfunded
actuarial liability by $2.4 billion and reduce the funded ratio by 6.5 percent. With this scenario,
the actuarial required employer contribution rate would increase in FY 2025 from 12.42 percent The Honorable Nick Hoheisel, Chairperson
Page 3—HB 2436
to 17.61 percent, or 5.19 percentage points. This increase would trigger the statutory cap on annual
employer contributions and would limit the increase to 1.2 percentage points, or approximately
$62.0 million for the State/School Group.
The cumulative theoretical actuarial effect on KPERS would be a decrease of
approximately 10.0 percent to the system’s funded ratio, which would be approximately the same
as in the system’s 2013 actuarial valuation. However, the actual long-term cost to KPERS would
depend on the extent of the required divestment and restructuring of the investment portfolio. With
a reduction in expected returns of 0.85 percent, the KPERS general investment consultant projects
that the investment portfolio returns would reduce by $3.6 billion over the next ten years when
compared to the current investment portfolio.
The Department of Administration, Office of Procurement and Contracts indicates that the
enactment of the bill would have no fiscal effect. The Office of the Attorney General states that it
is unable to estimate a fiscal effect for the agency. The Office of Judicial Administration indicates
that the enactment of the bill would have a negligible fiscal effect. The Pooled Money Investment
Board reports that the bill would have no fiscal effect. Any fiscal effect associated with HB 2436
is not reflected in The FY 2024 Governor’s Budget Report.
The League of Kansas Municipalities and the Kansas Association of Counites report that
the bill would have no fiscal effect on local governments.
Sincerely,
Adam Proffitt
Director of the Budget
cc: Jarod Waltner, KPERS
Tamara Emery, Department of Administration
Wendi Stark, League of Kansas Municipalities
Jay Hall, Kansas Association of Counties
Scott Miller, Pooled Money Investment Board
John Milburn, Office of the Attorney General
Vicki Jacobsen, Judiciary