Moody’s gives KPERS bonds lower rating
Topeka ? Moody’s Investors Service said Tuesday that Kansas’ plan to issue $1 billion in pension obligation bonds will do little to solve financial problems of the Kansas Public Employees Retirement System, and that it could create additional budget problems for the state in years to come.
The Wall Street rating company gave the proposed bonds an Aa3 rating, one notch below the state’s overall rating, saying that Kansas “will do little to solve the challenges surrounding its poorly funded state-administered pension plans.”
“Even if the state’s pension bonds work as designed, contributions must rise in order to address growing unfunded liabilities,” Moody’s said.
Kansas lawmakers authorized issuing the bonds this year, on the condition that the overall cost of the issuance, including interest rates and other fees, would not exceed 5 percent.
Rebecca Floyd, general counsel for the Kansas Development Finance Authority, which manages the state’s bond issues, said the state plans to proceed with the bond sale Wednesday and that officials remain “cautiously optimistic” that the final price will come in below the 5 percent cap.
“We should know by early afternoon (Wednesday),” she said. “We are in a pre-pricing period right now. Investment banks are gauging interest and taking pre-orders for the bonds. That’s been going reasonably well.”
KPERS manages a $16 billion investment fund that is the source of retirement benefits for roughly 289,000 active and retired employees of the state, public schools and local governments in Kansas, including the city of Lawrence, Douglas County and the Lawrence school district.
Officials estimate that fund is about $9 billion short of what it needs to meet its long-term obligation to pay out those benefits, an amount referred to as its “unfunded actuarial liability.”
As part of a major overhaul enacted in 2012, the state changed the benefit plan for new employees coming into the system, providing them with a smaller retirement benefit and requiring those employees to contribute more. That reform also gave current employees the option of contributing more in exchange for a slightly enhanced benefit plan.
In addition, the state is supposed to gradually ratchet up the amount it contributes each year until the fund comes into actuarial balance.
The idea behind the bond issue is that by injecting $1 billion of cash into the fund, the bonds will immediately reduce the system’s long-term unfunded liability. And by investing that money along with the fund’s other assets, the interest earned on the money will shorten the length of time it takes for the pension fund to get back in balance.
However, anticipating that the bond sale would happen, lawmakers also reduced the amount of money the state would otherwise contribute into the pension plan for the next two years, a move that Moody’s criticized as trading a “soft” liability, its underfunded pension, for a “hard” liability of bonded indebtedness.
“Debt represents an inflexible fixed cost that cannot be renegotiated or modified without defaulting,” Moody’s said. “By contrast, an unfunded pension liability can sometimes be modified through benefit reforms or funded over a longer timeline without defaulting.”
Floyd said state officials have never suggested that the bond issue by itself will solve the long-term funding problems in KPERS.
“It is one measure in bridging that gap,” she said. “Ultimately it will help to fund the unfunded actuarial liability in a little bit shorter time period than without the issuance of the bonds.”
Gov. Sam Brownback’s budget director Shawn Sullivan issued a statement through the governor’s press office saying the financial problems at KPERS pre-date the Brownback administration.
“It is unfortunate that previous administrations chose to underfund KPERS,” Sullivan said. “Governor Brownback and the Legislature have invested hundreds of millions more into the pension system as compared to the pre-recession state contribution levels. With the issuance of the pension obligation bonds, the KPERS actuaries project that the state will be meeting the ‘actuarial required contribution rate’ by State Fiscal Year 2020. Without the bonds, the state will meet this threshold by State Fiscal Year 2021. In either scenario, this will be the first time in 20 years where the state would fully fund the annual contribution rate.”