Moody’s Weighs In On Kansas Bond Plan; Gov. Officials Defend Plan

Kansas on Wednesday began the process of issuing $1 billion in pension bonds; in a corresponding report, rating agency Moody’s this week weighed in on the plan – and the agency didn’t like what it saw.

The gist of the Moody’s report: the bonds will add long-term risk to the state’s pension funding but will do little to improve its funding problems. The state making its full annual contributions would be a sounder strategy.

Reuters summarized the report:

The state is taking on more long-term risk to achieve near-term budgetary relief, according to the ratings agency. With the scheduled bond sale, the state reduced its pension contributions for the next few years, Moody’s said.

The $1 billion increase from the sale has only a modest impact on pension funding levels, the rating agency said. Kansas projects that the bond sale will improve the funded ratio for pensions to 73 percent in 2020 from 59 percent at the end of 2014.

“Although the (pension obligation bonds) fit into a plan to achieve full pension funding by 2033, adding $1 billion of debt to do it represents a riskier strategy than the simpler alternative of making larger annual pension contributions,” Moody’s said.

Kansas officials took the opportunity to defend the bond issuance, the success of which relies on investment returns outpacing the interest paid on the bonds.

From the Kansas City Star:

State officials expect the Kansas Public Employees Retirement System to earn more from investing the funds raised from the bonds than they will pay investors over the 30-year life of the debt, making it easier to close a long-term funding gap facing the system. Supporters compare the move to paying off high-interest credit card debt with a lower-interest loan.

“This isn’t a crap shoot on the part of the state,” said Kansas Senate pensions committee Chairman Jeff King, an Independence Republican.

[…]

Kansas officials argued that issuing the bonds immediately boosts the pension system’s funding ratio and makes it easier to close the long-term gap.

“It is unfortunate that previous administrations chose to underfund KPERS,” Brownback budget director Shawn Sullivan said in an emailed statement.

The interest rate on the bonds is 4.68 percent, according to the Star. That means for the state to break even, the ensuing pension investment will need to earn 4.68 percent over the life of the bonds.

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