Topeka A former state legislator who worked on public employee pension issues for years said Wednesday that the state was going down the wrong path as it embarked on a plan to shore up the pension system by borrowing money.
"This ranks up there as probably the stupidest bill ever passed by the Legislature," said Kerry Patrick, a Leawood Republican who served on legislative committees that dealt with the Kansas Public Employee Retirement System.
The state is considering issuing $500 million in taxable bonds as part of a strategy to fix to the pension system.
No action on the bond issue is scheduled for several months, as various committees must take up the matter. But the subject probably will be discussed during a Friday meeting of the KPERS board.
In the past legislative session, lawmakers approved issuing $500 million in bonds to reduce the gap between the system's assets and benefit obligations.
That gap, called the unfunded liability, has increased from $1.2 billion to $1.8 billion in one year because of inadequate contributions by the state to the retirement plan and the downturn in the stock market.
Currently, 140,000 public employees pay into the system, and about 52,000 retirees receive benefits. KPERS distributes $551 million in retirement benefits each year.
The theory behind using $500 million in bonds is that the state could borrow the money at a low interest rate, invest it and make more than the interest payments on the bonds.
Patrick said the idea was too risky and that most Wall Street wizards who had attempted this had failed.
"A lot of people have gone bankrupt doing this," he said. "What if you end up making a major investment in an Enron kind of company? You lose a lot of money," he said.
Stan Roth, president of the Douglas County Association of Retired School Personnel, said the plan was "shortsighted." "But that's the way we do things around here," he said.
Supporters of the proposal say that despite losing money the past couple of years, KPERS investments make money in the long haul.
The 10-year average investment performance for KPERS is 8.1 percent, but the average of the past three years has been a negative 4.5 percent. Last year, the system's portfolio was down 6.9 percent, reducing its assets from $9.1 billion to $8.2 billion.
"I guess that's what the Legislature is banking. They're saying, 'Let's buy these bonds now at a low rate and, assuming the market will go up, we'll be smelling like a rose in 2015," Roth said.
"That's fine, but in the meantime, these bonds will have to be paid off by the younger generation. That's too bad for them, but OK for retirees," he said.
Before the bonds can be issued, the proposal has to be considered by a House-Senate legislative committee on pensions in consultation with KPERS, and then the State Finance Council, which is led by Gov. Kathleen Sebelius.
The legislative committee is expected to start working on the proposal next month.