Kansas House Approves $1.5 Billion Pension Bond Plan

The Kansas House on Wednesday approved a plan to issue $1.5 billion in pension bonds in a bid to pay down a portion of the liabilities accrued by the state’s Public Employee Retirement System (PERS).

But the bond issuance is far from a sure thing; the Senate last month passed its own version of the plan, which only includes $1 billion in bonds.

Now, the two sides must come to the negotiating table – although nobody seems particularly enthusiastic about either plan.

From the Associated Press, via the Winfield Courier:

Kansas is moving closer to issuing $1 billion or more in bonds to bolster its pension system for teachers and government workers, even though many lawmakers see it as financially risky and Gov. Sam Brownback acknowledged Thursday, “I’d rather we weren’t doing this.”

[…]

The House approved its pensions bill Wednesday, 67-57. Its plan would authorize $1.5 billion in bonds, but it doesn’t assume that the schedule for closing the long-term funding gap will be stretched out.

The Senate passed its proposal last month on a 21-17 vote. Its bill calls for $1 billion in bonds and assumes KPERS takes until 2043 to close its long-term funding gap.

Both proposals wouldn’t allow the bonds to be issued unless the state paid 5 percent or less in interest to investors. The pension system expects its own investments to earn an average of 8 percent annually, long term.

Critics worry that KPERS might not beat the interest-rate spread. And in a report last year, the Center for Retirement Research at Boston College said issuing bonds decreases financial flexibility, turning pension payments that can be modified into firm bond payments.

[…]

Supporters of this year’s proposals note that Kansas issued $500 million in pension bonds in 2004. The state is paying 5.39 percent interest, while KPERS has earned an average of 7.7 percent on its investments since then, even with the Great Recession of 2008-09.

As notes above, the proposal is risky because its success depends on investment returns outpacing the interest payment on the bonds.

If the bonds are issued, they are expected to carry an interest rate around 4.5 percent, according to one lawmaker.

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