Greg Stumbo | Pension360

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.

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 Bond Proposal Clears House Committee; Vote Could Come Next Week

Legislation is moving forward that would let the Kentucky Teachers Retirement System (KTRS) issue $3.3 billion in bonds to help ease the system’s funding shortfall.

On Tuesday, the bill cleared Kentucky’s House Budget Committee without any opposition.

The bill’s sponsor, House Speaker Greg Stumbo, said a House vote could be coming as soon as next week.

If passed, the plan’s success hinges on KTRS investment returns exceeding the interest on the issued bonds.

More from the Courier-Journal:

Without a clear plan to ante up more money, lawmakers on the powerful House Budget Committee are backing legislation that would let KTRS issue $3.3 billion in bonds to prop up its investments over the next eight years.

[…]

If approved, KTRS would issue the bonds in fiscal year 2016. Pension officials estimate that they can borrow money at 4.5 percent interest and earn returns of 7.5 percent through investments. The plan also calls on the state to begin gradually increasing contributions in the next budget cycle.

All together, that would cut the state’s annual retirement contribution in half — from more than $800 million each year to about $400 million a year — by 2026.

KTRS says it can cover the costs by reshuffling finances for certain benefits and by reappropriating debt service that’s already in the state budget and slated to retire.

Stumbo says he traditionally opposes pension bonds but argued Tuesday that the state could capitalize on interest rates, which have dropped to 50-year lows. “That makes this window of opportunity that we have so attractive,” he said.

The measure is officially called House Bill 4.

Top Kentucky Lawmaker Close to Filing Bill For Additional Teacher Pension Funding

Kentucky House Speaker Greg Stumbo says he is planning on filing a bill by the end of the week that would give additional funding to the state’s Teacher Retirement System.

The funding would come through bond sales and could lead to an infusion of nearly $1 billion into the teachers’ system.

Not all lawmakers are on board with the idea of issuing bonds to pay down pension debt. But Stumbo says the time is now.

From the Courier-Journal:

Stumbo, D-Prestonsburg, said authorizing bonds would allow the system to capitalize on historically low borrowing rates and refinance its pension debt. He compared it to refinancing a home mortgage.

“I don’t generally favor bonding these pension obligations, but since the market is so favorable, it would be irresponsible for us not to at least consider what they proposed,” he said.

Stumbo said Thursday that the bill remains under review by pension officials but that he expects to file legislation within the next day.

KTRS has proposed two options for lawmakers to consider in the 2015 legislative session.

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

A second option for $3.3 billion in bonds could fully fund the system for eight years and save around $445 million annually by 2026.

The Kentucky Teacher Retirement System has $14 billion in unfunded liabilities.