Topeka ? Kansas leaders Monday voted to borrow $500 million to shore up the public employees’ pension system, simultaneously sinking the state further into debt and raising the stakes on casino gambling.

In a meeting of the State Finance Council, Gov. Kathleen Sebelius voted for the proposal aimed at helping the Kansas Public Employees Retirement System, and said the state should pay off the KPERS bonds with revenue from expanded gambling.

“It will be my intention to earmark a portion of the gaming revenue for this very debt service,” said Sebelius, who is pushing a proposal to develop state-owned casinos.

But Senate President Dave Kerr, a Republican from Hutchinson who has been a staunch supporter of the $500 million bond issue for KPERS, said expansion of gambling was a separate issue.

“That doesn’t have any influence at all on gaming’s chances. I don’t think it has anything to do with gaming,” Kerr said.

Nonetheless, Kerr joined Sebelius in voting to issue the bonds.

A hot topic

The question of how to pay off the bonds has been a hot topic for more than a year. Under the proposal approved Monday, the state will borrow $500 million within the month, then deposit the money with KPERS, the retirement fund for 240,000 state workers, teachers, city and county workers and classified employees at Kansas University and the other state universities.

The pension system will use the funding to try to narrow the nearly $3 billion gap between future pension obligations and current assets, a rift officials say was caused by the downturn in the stock market and inadequate contributions from the state.

KPERS plans to invest the bond funds, hoping to earn more money in the recently revived stock market than the amount of interest the state has to pay to retire the bonds.

Some legislators have complained that the bond plan could collapse with another dip in the stock market.

But others say KPERS investments historically have earned an average return of 8 percent per year, while the bonds will carry an interest rate of less than 6 percent.

The council, chaired by Sebelius and including legislative leaders, voted 8-1 for the proposal, with the lone dissenter being House Minority Leader Dennis McKinney, a Greensburg Democrat, who has criticized the plan as too risky.

But Kerr said the proposal made sound economic sense.

“Long term, it (the bond issue) will have the effect of saving the state hundreds of millions of dollars. This truly is the linchpin to solving the problems,” he said.

Sebelius agreed on the need for the bonds, but now the dispute will be how to pay them off.

Another budget demand

The state will start retiring the debt in 2005, paying $10 million the first year, $15 million the second year, $27 million the third year, and $37 million the fourth year and for each year after that through 2034.

That money will come from the general fund, competing with demands to fund schools, universities, social services and numerous other state functions.

Last week, Sebelius unveiled a proposal that would allow slot machines in five so-called “destination” casinos, the parimutuel tracks, and video lottery terminals at fraternal organizations. But she didn’t mention her desire to divert the state’s portion of that gambling revenue toward paying off the KPERS bonds.

She said she didn’t mention it then because the council hadn’t taken action yet, but added, “that has been part of the plan all along.”

If the Legislature fails to pass a gambling bill that includes the governor’s bond payback plan, then the bonds will be repaid from the state general fund.

Sebelius, who also is pushing for $465 million in bonds to complete the state highway program, said she didn’t think the increased debt approved Monday would hurt state government’s financial condition.

“I think it’s a good investment to close this liability,” she said.

The amount of money the state of Kansas must pay each year to retire debt has more than tripled in the past decade, from $78.8 million in 1994 to $278.4 million in the last fiscal year, according to state budget figures.

Monday’s vote followed negotiations between Sebelius and legislative leaders. Earlier, Sebelius wanted the debt paid off from the state’s contributions into KPERS because, she said, the state simply couldn’t afford to take money out of the general revenue fund to pay off the bonds.

But she and legislative leaders said they were able to compromise by structuring the deal so payments of the bonds didn’t start until 2005 and took four years to reach their maximum annual cost.