Kentucky Pension Bond Proposal Clears House

A bill aimed at easing Kentucky’s pension shortfall passed the House on Monday, less than two weeks after the bill came out of committee.

The bill would allow the issuance of $3.3 billion in bonds to help ease the funding shortfall of the Kentucky Teachers’ Retirement system (KTRS).

The proposal comes with risk: the success of the plan depends on the system’s investment returns exceeding the interest on the issued bonds.

If that happens, KTRS can pocket the difference and funding will improve. But if investment returns lag, KTRS could end up losing money.

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House Speaker Greg Stumbo, a Democrat from Prestonsburg, said the risks of borrowing to fund teachers’ retirements are outweighed by not taking action.

“We contracted, we promised, they relied upon that and gave us years of their lives and service to the children of our state,” Stumbo said. “We owe them that debt. It’s going to be paid.”

If the $3.3 billion bond authorization is approved by the Senate and is signed by the governor, it would be the largest bond issue that Kentucky has ever passed.

Several Republican representatives argue that the borrowing that much money would overburden the state’s debt load.

House Minority Leader Rep. Hoover, a Republican from Jamestown, compared the measure to using borrowed money to go to a casino.

“It will seem like a good idea in retrospect but if you lose, paying back the debt is going to be a big big problem,” Hoover said.

KTRS officials say that the state can assume a 7.5 assumed rate of return on investments in its portfolio and would only have to pay 2 to 4 percent interest in the bond market if the bill passes this session.

However, Stumbo admits, an economic downturn would make the bond a risky proposal because the rate of return could plummet.

“Could that happen? Yeah it could happen. Happened once before. But I don’t think it’s going to happen,” Stumbo said.

KTRS is 53 percent funded, although that number will tick lower under new GASB accounting rules.

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