Tag: borrowing

Kentucky Pension Bond Proposal Clears House

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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.

More from WFPL:

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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Kentucky Teachers Pension Presents Bond Proposals To Lawmakers

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We learned on Wednesday that the Kentucky Teachers’ Retirement System (KTRS), one of the most under-funded education retirement funds in the country, was seeking funding help from the state legislature.

Now, many more details have emerged about the proposals the System has presented to lawmakers. KTRS presented lawmakers with two options. The Courier Journal has the details:

KTRS suggested Wednesday that lawmakers consider two borrowing scenarios in the 2015 legislative session, and supporters say the proposals could reduce taxpayer cost in the long run while helping the system cope with $13.8 billion in unfunded liabilities.

One option involves a $1.9 billion bond to help fully fund the retirement system for the next four years and eventually decrease annual pension costs about $500 million by fiscal year 2026.

A second option includes a $3.3 billion bond that could fully fund the system for eight years and reduce annual costs in 2026 by around $445 million.

Both plans are based on 30-year bonds with interest rates in the range of 4 percent, and either option could be funded by re-purposing debt service and revenue streams that already exist in the state budget, according to KTRS.

Beau Barnes, KTRS general counsel and deputy executive secretary of operations, said the system is not “wild about bonding.” But he argued that liabilities are growing at 7.5 percent a year and compared the proposal to refinancing a home at a lower interest rate.

“We were asked what we could do for the pension fund without requiring additional dollars out of current budgets, and these were the only things we could think of,” Barnes said. “We didn’t really see any other alternative.”

KTRS has at least one lawmaker on their side. House Speaker Greg Stumbo voiced his support for the plan, according to MyCn2 News:

“I think we need to listen very carefully to it and work with them to try to craft some form of a proposal, which hopefully we can get enough support to pass in both chambers because these market rates won’t be favorable much longer in my judgement,” Stumbo, D-Prestonsburg, said in the committee meeting, noting the Federal Reserve will likely get pressure from banks to raise interest rates as the economy improves.

“… What they’re saying is we can’t tarry. If we wait too long, we’ll lose this window of opportunity.”

KTRS manages $18.5 billion in assets.