Finance Council authorizes $1 billion in pension bonds to shore up KPERS
Topeka ? State officials in Kansas took the first step Thursday toward borrowing $1 billion to shore up the troubled Kansas Public Employees Retirement System, but the deal could be called off if interest rates continue to rise.
The State Finance Council — a group made up of the governor and legislative leaders — passed a resolution Thursday authorizing the Kansas Development Finance Authority to issue the 30-year bonds.
Under a bill that lawmakers passed this year, the state could issue the bonds only if the total cost of issuance, including the interest and associated fees, comes in at less than 5 percent.
The money would be deposited into the KPERS fund, and it would apply to the portion that funds retirement for state and school district employees. KPERS officials assume the money would earn the average rate of return of about 8 percent a year.
The goal would be to reduce the fund’s estimated $9 billion unfunded liability. That’s the difference between the fund’s current assets, plus its projected earnings, and the long-term liabilities it has already incurred.
KPERS executive director Alan Conroy said the state and school employee portion of the system has only about 60.7 percent of the assets it needs to fund its long-term obligations. Infusing $1 billion in bond proceeds into the system would immediately raise its funding ratio to almost 68 percent.
Pension system analysts say an 80 percent funding ratio is the minimum needed to be considered adequately funded.
The obligation of paying off those bonds would fall on the state general fund. Budget Director Shawn Sullivan told the council that would cost $32.5 million in the current fiscal year, which began Wednesday, and $65 million next fiscal year.
Both of those payments were included in the two-year budget that lawmakers just passed.
When lawmakers passed the bill, officials estimated that the total cost of the bonds at that time would be about 4.7 percent. But Rebecca Floyd, general counsel for KDFA, said interest rates have been inching up in recent weeks, and if the bonds were issued today the cost would be just under the 5 percent cap.
Some analysts believe interest rates will continue to rise as the Federal Reserve Board phases out its “quantitative easing” policy, which was meant to stimulate borrowing and economic activity in the wake of the Great Recession.
Both Democrats on the council, Senate Minority Leader Anthony Hensley, of Topeka, and House Minority Leader Tom Burroughs, of Kansas City, voted against the proposal.
“It seems very basic that the last person who ought to be borrowing money in the stock market is the person who has no money in reserve,” Hensley told reporters after the meeting. “And the state doesn’t have the kind of money in reserve to make the debt service payment.”
Floyd said she expects it will take about six weeks to complete all the steps necessary to issue the bonds.
One of those steps will be to have the bonds rated by the state’s credit rating agencies, Moody’s Investors Service or Standard and Poor’s.
Both of those agencies have downgraded the state’s rating in the past year, citing the sweeping tax cuts enacted in 2012 and 2013 and the revenue shortfalls that have followed.