Archive for Monday, February 9, 2015

Kansas lawmakers mulling $1.5B in bonds to shore up state pension system

February 9, 2015, 9:02 a.m. Updated February 9, 2015, 10:03 p.m.

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— Kansas lawmakers are considering an unusual plan to shore up the state's troubled pension system that amounts to borrowing $1 billion to $1.5 billion in the bond market in order to pay down a roughly $9 billion long-term funding gap.

The plan involves issuing what are called "pension obligation bonds" and investing the proceeds of those bonds into the Kansas Public Employees Trust Fund where they would yield earnings along with the trust fund's other investments.

On the other end of the deal, however, state taxpayers would be responsible for paying off the pension bonds while, at the same time, continuing to contribute into the pension system.

"It's already been done once, so it can work," said KPERS Executive Director Alan Conroy.

In 2004, the state issued $500 million in pension bonds, and it is still paying about $33 million a year out of the state general fund to retire those bonds. Those bonds were issued at 5.39 percent interest, while the KPERS fund has been earning, on average, 7.45 percent on the investments, a profit of about $174 million.

Still, that infusion of cash was not enough to address the pension fund's long-term problems, especially after the fund suffered significant losses during the Great Recession.

As of today, the fund holds about $13 billion in assets, but that is only about 60 percent of what it would actually need over the next 40 years to pay off all of the obligations it has already incurred.

In 2012, Kansas lawmakers passed a major overhaul of KPERS, increasing the contribution rate for both the state and the public employees covered in the plan. That overhaul also created a new, less generous, pension plan for new employees hired after the first of this year.

But the increased contribution rate agreed to in 2012 is now one of the factors adding to the state's current revenue shortfall, now projected at around $300 million just for the remainder of this fiscal year.

In response, Gov. Sam Brownback has proposed reducing the state's contribution for the rest of this year by about $52 million. And he is proposing the state issue $1.5 billion in pension obligation bonds which, if approved, would allow the state to continue holding its contribution rate down.

In addition, Conroy said, the fund would reach its goal of being 80 percent fully funded by 2022, about three years earlier than it would without the bond issue.

A Senate committee will hold a hearing Wednesday on one bill that would authorize $1 billion in pension bonds. A similar bill is pending in the House that would authorize $1.5 billion in bonds.

Supporters of the plan say it could save the taxpayers money over the long run because the state probably would only have to pay about 4.5 percent interest on the bonds. But it would expect to earn around 8 percent a year by investing the proceeds through the KPERS trust fund.

Financial experts say that using borrowed money to bet on interest rate spreads can be a risky venture known as "arbitrage," and public entities like state and local governments are generally not allowed to do it.

But Conroy said the proposals being considered are not "pure arbitrage" because the state would not rely on the interest earnings to make the debt payments. Instead, the debt service payments would come directly from the state general fund.

In other words, even if the state loses the bet — if, for instance, investment earnings fall below the interest rate on the bonds — the KPERS fund would still get the benefit of the cash infusion, while the payments on the bonds would come out of the state general fund.

According to information from KPERS, a $1.5 billion bond issue, at today's interest rates, would require annual payments of $90 to $95 million over 30 years, for a total of $2.7 to $2.85 billion.

Comments

Lawrence Freeman 3 years ago

Typical repub thinking, borrow and spend. The rich make money from the bonds and the taxpayer gets burned again.

Philipp Wannemaker 3 years ago

These idiots are exactly why I retired Jan 1, 2015 and pulled out the maximum 50% of my account. Don't expect to ever collect the rest, but at least I got half what I was promised.

Greg Cooper 3 years ago

Sounds like a good idea. Let's borrow the money we were supposed to have paid long ago, pay interest on it, and not worry about funding the KPERS until next year when we can borrow more money to pay what we didn't pay in the first place.

Sound economics, Sam.

Lawrence Freeman 3 years ago

Kansas sounds like a family going thru bankruptcy. Lost their income, borrowing from family and friends and maxing out credit cards, just trying to stay afloat.

Dorothy Hoyt-Reed 3 years ago

It's what the federal government has done with Social Security. Reagan started borrowing money from it to cover the tax cuts he gave to the rich. He finally had to go ahead and raise taxes to "fix" his trickle down theory, but the money has never been paid back to Social Security. In fact, they keep "borrowing" more. That's the real reason there is a Social Security crisis.

Bob Reinsch 3 years ago

I'm going to guess that we won't get the best interest rates due to the state's degraded credit rating. Please correct me if I'm wrong.

Dorothy Hoyt-Reed 3 years ago

You do remember that state legislators also get KPERS, even though they are part time employees. They are paid part time wages, but their KPERS are based on what that amount would come up to if they worked all year. Many of these legislators end up getting more from KPERS than full time state workers and teachers.

Why aren't teacher's KPERS figured this way too? In the Republicans mind teachers are part time, until they aren't. But part time legislators are full time when it profits them.

Why don't the legislators drop all their KPERS. They can immediately have everything they have donated thus far, but not the Kansas contribution, and they can no longer participate in the system.

Do not bankrupt the system. If you cut the retired state employees off their pension, there will be millions of dollars not going into the economy. They will not be able to buy as much. They will be pushed into poverty. That's the real flow of the trickle. The retired have no money to go out to eat, the diner loses money. The retired have no money to fix their car, the mechanic loses money, etc. This is the trickle down theory that the Republicans support.

Steve King 3 years ago

How could you trust them to pay off the bonds? They are in the red now. Two credit downgrades. You'd have to be a fool to invest in these junk bonds. And what's to keep them from skimming off these monies to pay bills?

Scott Burkhart 3 years ago

This unfunded liability occurred long before Governor Brownback took office. Unfunded pension plans have been the standard operating procedure for years. Brownback is trying to make the best of a bad situation. He's making an effort to save the system. I would think all of you "Nanny Statists" would be pleased. You'd gripe about which hand Governor Brownback uses to wipe his backside.

Lawrence Freeman 3 years ago

And republicans have controlled the funding forever. Now they want to max out the states credit card and saddle the taxpayers with billions more in debt for 30 years.

PS In case you hadn't noticed it's brownbacks tax cuts that are causing the problems.

Philipp Wannemaker 3 years ago

Don't confuse Scott with facts. Dave has already fed him the Koch line and he believes it.

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