New Jersey Grapples With Cost of Pension Bonds Issued in ’90s

bonds

In 1997, New Jersey issued $2.8 billion of pension bonds to shore up its underfunded retirement system.

The success of such a plan depends on investment returns outpacing interest payments. But the ensuing dot-com crash threw a wrench into the plan’s efficacy, and more than 15 years later, New Jersey is now dealing with the cost of the bonds.

More on the mounting debt service payments, from Bloomberg:

The payments on the debt, which was sold in 1997 to bolster the public-employee pension plans, are set to grow to almost $500 million in 2020 from $342 million this year, according to a Feb. 13 report released by the state treasurer. The annual cost will remain close to that level until the debt is paid off at the end of next decade.

“The pension debt service is skewed to the out-years,” said Richard Keevey, a fellow at Rutgers University in New Brunswick, New Jersey, who was budget director for former Governor Jim Florio, a Democrat. “It starts out low and rises sharply.”

[…]

Interest and principal payments on debt will rise 15 percent next year to $3.99 billion.

Investors demand additional yield to buy New Jersey debt. An index of 10-year New Jersey bonds yielded about 2.8 percent Tuesday, 0.63 percentage point above AAA munis, data compiled by Bloomberg show. The yield gap reached 0.64 percentage point Feb. 18, the most since at least January 2013.

The pension bonds carry yields as high as 7.65 percent on debt maturing in 2026. Most can’t be repurchased from investors before they mature, which prevents New Jersey from refinancing to take advantage of lower interest rates.

The pension bonds will cost $350 million in FY 2015-16 and $397 million in FY 2016-17, according to the state treasurer’s report.

 

Photo credit: Lendingmemo via Flickr CC License

Kentucky Pension Bond Bill Rejected, Amended in Senate

kentucky

The Kentucky Senate has rejected a bill that sought to issue $3.3 billion in bonds to help ease the funding shortfall of the Kentucky Teachers’ Retirement system (KTRS).

The bill passed the House late last month, but was stopped short in the Senate on Monday.

Some lawmakers cited the risk of the bonds as a reason for the bill’s rejection; the success of the plan depended on the system’s investment returns exceeding the interest on the issued bonds.

If that were to happen, KTRS could pocket the difference and funding will improve. But if investment returns lag, the pension-funding situation would worsen further.

Senators amended the bill to call for the creation of a task force to examine the pension system and recommend funding solutions.

More on the new bill, from the State-Journal:

The substitute adopted in the Senate Standing Committee on State and Local Government instead directs the Legislative Research Commission to create a Kentucky Teachers’ Retirement System task force to study and make recommendations for funding and stabilizing the retirement system.

The task force will include:

* Six members of the Senate with four appointed by the Senate president, two appointed by the Senate minority floor leader;

* Six members of the House with four appointed by the House speaker, two appointed by the House minority floor leader;

* The House speaker and Senate president will each appoint one co-chair from their chambers;

* The task force will have monthly meetings during the interim and report its findings to the LRC for referral to a committee by Dec. 18, 2015.

The bill is officially called House Bill 4.

 

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Pennsylvania Pension Officials Defend Investment Strategy After Governor Calls for Overhaul

one dollar bill

Last week, Pennsylvania Gov. Tom Wolf released his first budget proposal.

Wolf has said many times that he doesn’t support a full overhaul of the state’s pension system. But his budget did contain some pension-related changes.

Wolf is calling for the state’s pension funds to take a more passive approach to investing and to cut down the fees it pays to managers. The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

PhillyDeals columnist Joseph N. DiStefano talked to spokesman for the state’s two pension funds – SERS and PSERS – and got their official reactions to the budget proposal.

SERS reaction:

“We are working to gather details on the Governor’s plan, so I can’t speak to it specifically,” SERS spokeswoman Pamela Hile told me. “What I can tell you is that last year, a little more than 0.5% of the total fund value went to management fees. This, in the view of the Board, does not represent an excessive amount.”

“Looking at the issue from a long-term perspective, over the past decade, SERS paid $2.4 billion in fees, while earning $19.7 billion net of fees and expenses AND paying out $23.2 billion in retirement benefits.

“Compare that performance to an industry standard 60% equity/40% bond index fund, SERS’ performance added $4.9 billion of value to the fund with 0.5% less volatility.

“To further illustrate this value, our alternative investment program, built with top-tier investment managers, outperformed the U.S. public market equities return by 5% net of all fees over the decade ended 2013… Over the past five years, we reduced fees 30%. We get good value for the fees we pay…

“In 2013, SERS earned $3.7 billion, after all investment management fees and expenses of $175 million were paid. From a basic dollar perspective, that’s like paying $175 over the year to net $3,700 in your pocket at the end of the year.”

The PSERS spokesperson told DiStefano:

“We are not aware of the details of the Governor’s proposal on investment management fees. We have not met with him,” and won’t comment on details of the proposal until they are available.

“Our investment management fees are not excessive relative to the incremental value generated. PSERS paid $482 million in investment expenses for the fiscal year ended June 30, 2014. This amounts to 0.93% of our fund.

“By spending those fees, we earned an additional $1.27 billion (net of fees) ABOVE the index return,” Williams added in an email. “We would not have that additional $1.27 billion or 2.8% in additional investment performance if we did not use active managers.

“Looking longer term for the past 15 fiscal years (2000-2014), PSERS incurred $4.96 billion in investment management fees. In exchange for those fees, the Fund received the index returns plus an additional $16.42 billion in excess performance gross of the fees incurred. So, net of fees, PSERS generated $11.46 billion of incremental performance above the applicable index returns.

Read more of their remarks, including reaction to Wolf’s pension bond proposal, here.

 

Photo by c_ambler via Flickr CC License

Pennsylvania Gov. Budget Proposal: Overhaul Pension Investment Strategy and Cut Fees, Managers

Tom Wolf

Pennsylvania Gov. Tom Wolf released his first budget proposal last week, and there were several items of interest related to pensions.

On Wednesday, Pension360 covered Wolf’s proposal for issuing $3 billion in pension bonds to attempt to shore up the funding of the state’s two major pension systems.

But Wolf is also proposing an overhaul of the systems’ investment strategy.

Specifically, Wolf is calling for the systems to take a more passive approach to investing and to cut down the fees it pays to managers.

The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

More from ai-cio.com:

The “commonsense reforms” mean its two state pension plans would have to “seek less costly passive investment approaches where appropriate,” according to the budget.

Pennsylvania’s employee and teachers’ pensions together have upwards of $50 billion in unfunded pension liabilities. Wolf’s budget blamed the growing gap primarily on “repeated decisions by policy makers to delay making the required contribution to fund our future pension obligations.”

The state has not paid its full pension bill for more than 15 years, the budget document noted.

While the proposal was light on specifics for reforming pension investment strategy, the outcome would “significantly reduce taxpayer costs for professional fund managers,” it claimed.

The state largest plan, the $52 billion Public School Employees’ Retirement System, already managed roughly a quarter of its assets in-house, as of June 2014. Its portfolio included relatively standard allocations to fee-heavy asset classes, such as private equity (16.3%) and real estate (13.8%).

Net-of-fees, the teachers’ pension returned an annualized 10.3% over the last five years.

The executive director of the state’s Public School Employees Retirement System defended the fund’s investment strategy in a newspaper piece last year.

 

Photo by Governor Tom Wolf via Flickr CC License

Pennsylvania Gov. Wolf Proposes $3 Billion Pension Bond

Tom Wolf

Pennsylvania Gov. Tom Wolf unveiled his budget proposal on Tuesday, and it contained a number of pension-related items.

The biggest was undoubtedly the proposed issuance of $3 billion in pension bonds, to be used to pay down the liability of the Public School Employees Retirement System (PSERS).

As is always the case with pension bonds, the state runs the risk of worsening its financial position. But if PSERS’ investment returns exceed the bonds’ interest rates, the state will come out on top.

More from Philly.com:

“A portion of the current unfunded liability for PSERS would be refinanced to take advantage of historically low interest rates, with all savings reinvested to reduce that liability.” Wolf wants to borrow $3 billion and give it to PSERS so it can reduce the recent increase in pension subsidies by school districts and the state treasury.

[…]

Given recent bond prices and Pennsylvania’s bond rating (third-worst of U.S. states after Illinois and New Jersey), rates for taxable Pennsylvania pension bonds “would be about 3.25% (for 10-year bonds) and maybe 4% in 30 years,” Alan Shanckel, municipal bond strategist for Janney Capital Markets in Philadelphia, told me. Pennsylvania would have to pay that percentage and beat its self-imposed 7.5% investment return target each year to make the bond pay.

Pennsylvania’s state-level pension plans are about 62 percent funded, collectively.

Report: Hedge Fund Assets Will Continue Growing in 2015, But Executives Recognize Underperformance

opposite arrows

A new survey, released Tuesday by Deutsche Bank, reveals that hedge fund executives expect hedge fund assets to grow by 7 percent and exceed $3 trillion in 2015, including $60 billion of net inflows.

But the majority of executives and investors surveyed – 66 percent – also recognized that hedge funds underperformed in 2014.

From the Wall Street Journal:

Investors included in the survey had on average expected returns of 8.1%, but said they only got returns of 5.3%.

[…]

However, some investors are planning to invest more in hedge funds, despite last year’s lackluster returns.

The survey said 39% of investors plan to increase allocations to hedge funds this year, including 22% who expect to increase the size of their allocations by $100 million or more.

Other key findings from the survey, from a Deutsche Bank press release:

Investors are looking for steady and predictable risk-adjusted returns – Investors risk/return expectations for traditional hedge fund products continues to come down in favor of steady and predictable performance: only 14% of respondents still target returns of more than 10% for the hedge fund portfolio, compared to 37% last year.

With this in mind, however, 40% of respondents now co-invest with hedge fund managers as a way to increase exposure to a manager’s best ideas and enhance returns. 72% of these investors plan to increase their allocation in 2015.

Investors see increasing opportunity in Asia – 30% of hedge fund respondents by AUM plan to increase investment in Asian managers over the next 12 months, up from 19% last year. Even more noteworthy is the growing percentage of investors who see opportunity in China, up to 25% from 11% by AUM, year-on-year. India is expected to be a key beneficiary of flows, with 26% of investors by AUM planning to increase exposure to the region, whereas only 4% said the same last year.

 

Photo  jjMustang_79 via Flickr CC License

Japan Pension’s Portfolio Overhaul Pays Dividends With Record Quarter

Japan

A shift into riskier investments has paid off for Japan’s pension fund – at least in the fourth quarter of 2014.

In late 2014, Japan’s Government Pension Investment Fund (GPIF) began a portfolio overhaul that involved shifting a higher percentage of assets away from bonds and into stocks.

The well-publicized shift proved to be a boon for the Tokyo stock market, and the pension fund rode that wave as the fourth quarter of 2014 proved to be the second-best quarter in the fund’s history.

From the Wall Street Journal:

The GPIF on Friday reported a ¥6.6 trillion ($55 billion) investment profit in the December-ended quarter, a return of 5.2% compared with the previous quarter. The fund generated a return of 2.9% in the third quarter.

The value of the its assets under management reached ¥137 trillion, the highest since the fund was created in 2001.

GPIF officials don’t reveal the specifics of their investment activities, but figures released Friday showed the fund has likely sold about ¥6.5 trillion of Japanese government bonds during the quarter while buying roughly ¥2 trillion each of overseas and domestic equities, according to a Wall Street Journal analysis.

[…]

At the end of October, the GPIF announced major changes to its asset allocations, cutting its intended weighting to domestic bonds to 35% from 60%. It raised the allocation to foreign and domestic equities to 25% each, from 12% each, and to foreign bonds to 15% from 11%.

The fund is still only halfway toward achieving these targets.

The GPIF manages $1.1 trillion in pension assets and is the largest pension fund in the world.

 

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Private Equity Eyes Longer Timelines For Largest Investors

binoculars

Some private equity firms are considering offering new investment structures that would allow their largest clients to invest over a longer period of time, according to a New York Times report.

The new structure would extend the timeline of some investments to over 10 years, which could appeal to institutional clients looking for longer-term, lower-risk investments in the private equity arena.

More details from the New York Times:

Joseph Baratta, the head of private equity at the Blackstone Group, the biggest alternative investment firm, said at a conference in Berlin on Tuesday that the firm was speaking with large investors about a new investment structure that would aim for lower returns over a longer period of time.

Mr. Baratta, whose remarks were reported by The Wall Street Journal, said the investments would be made outside of Blackstone’s traditional funds, which impose time limits on the investing cycle. Invoking Warren E. Buffett’s Berkshire Hathaway, Mr. Baratta said he wanted to own companies for more than 10 years.

”I don’t know why Warren Buffett should be the only person who can have a 15-year, 14 percent sort of return horizon,” Mr. Baratta said, according to The Journal.

His remarks, at the SuperReturn International conference, were only the latest example of chatter about this sort of structure in private equity circles.

News reports last fall said that Blackstone and the Carlyle Group, the private equity giant based in Washington, were both considering making investments outside their existing funds. Such moves would let the firms buy companies they might otherwise pass on — big, established corporations that don’t need significant restructuring but could benefit from private ownership.

[…]

Blackstone, which has not yet deployed such a strategy, might gather a “coalition of the willing” investors to buy individual companies, Mr. Baratta said. This approach could be attractive to some of the world’s biggest investors, including sovereign wealth funds and big pension funds, which, though they want market-beating returns, also want to avoid taking too much risk.

Read the full NY Times report here.

 

Photo by Santiago Medem via Flickr CC

Pension Pulse: Is Farmland a Good Fit For Pensions?

farmland

On Monday, Pension360 covered the debate over a recent investment in a 115,000 acre tract of Saskatchewan farmland by the Canada Pension Plan Investment Board (CPPIB).

On one side of the fight is Dan Patterson, a rancher and former general manager of the Farm Land Security Board who is skeptical of the effect the investment will have on local people and land prices, among other things.

On the other side is CPPIB, who argues that the farmland will prove to be a good fit for both the pension fund and the locals.

On Tuesday, Leo Kolivakis of Pension Pulse weighed in on the broader issue of whether farmland is a good fit for pension funds. His comment is printed below.

______________________

By Leo Kolivakis, Pension Pulse

I have to admit, Mr. Patterson raises some excellent points that need to be properly addressed by CPPIB. In particular, how is CPPIB going to “maximize returns” without hurting the livelihood of local farmers and squeezing them out of owning farmland?

And when Mr. Leduc claims “CPPIB is quintessentially Canadian,” I say prove it by hiring a truly diverse workforce that reflects Canada’s multicultural landscape and takes into account the plight of our minority groups, especially aboriginals and persons with disabilities, the two groups with scandalously high unemployment. 

In fact, I have publicly criticized all of Canada’s large pensions for lack of diversity in the workplace, and for good reason. They simply don’t do enough to hire all minorities and it seems that operating at arms-length from the government is convenient when it suits their needs, like justifying their hefty payouts, but less so when it comes to taking care of society’s most vulnerable and diversifying their workforce (even though they should all abide by the Employment Equity Act).

Importantly, as someone who suffers from multiple sclerosis and has faced outright discrimination from all of Canada’s venerable public pensions, especially the Caisse and PSP, I challenge all of you to publish an annual diversity report which shows exactly what you’re doing to truly diversify your workforce. And no lip service please, I want to see hard statistics on the hiring of women, visible minorities, aboriginals and especially persons with disabilities.

So, when Mr. Leduc claims “CPPIB is quintessentially Canadian,” it just rubs me the wrong way. Let’s not kid each other, all of Canada’s large pensions are more Canadian for some groups than they are to others. And I take CPPIB to task because it should be leading the rest when it comes to diversity in the workplace.

Now that I got that off my chest, let me discuss some other concerns I have with pensions investing in farmland. Jesse Newman of the Wall Street Journal recently reported, Farmland Values in Parts of Midwest Fall for First Time in Decades:

Farmland values declined in parts of the Midwest for the first time in decades last year, reflecting a cooling in the market driven by two years of bumper crops and sharply lower grain prices, according to Federal Reserve reports on Thursday.

The average price of farmland in the Federal Reserve Bank of Chicago’s district, which includes Illinois, Iowa and other big farm states, fell 3% in 2014, marking the first annual decline since 1986, the Chicago Fed said. Prices for cropland during the fourth quarter remained steady compared with the previous quarter, according to the bank’s survey of agricultural lenders, though half of all respondents said they expect farmland values to decline further in the current quarter.

In the St. Louis Fed’s district, which includes parts of Illinois, Kentucky and Arkansas, prices for “quality” farmland gained 0.8% in the fourth quarter compared with year-ago levels, despite lower crop prices and farm incomes in the region. A majority of lenders in the district expect values to cool in the current quarter compared with the first quarter of last year, reflecting reduced demand for land amid tighter profit margins for farmers.

The reports spotlight an overall slowdown in the U.S. farm economy and in the appreciation of farmland prices. Crop prices had soared for much of the past decade, fueled by drought and rising demand for corn from ethanol processors and foreign importers. The gains pushed agricultural land values so high that some analysts warned of a bubble.

On Tuesday, the U.S. Department of Agriculture projected net U.S. farm income this year would fall to $73.6 billion, the lowest since 2009, from $108 billion in 2014.

Prices for corn, the biggest U.S. crop by value, have tumbled more than 50% since the summer of 2012, when they soared to record highs amid a severe U.S. drought. Growers produced the nation’s largest corn and soybeans harvests ever last autumn, helped by nearly flawless weather over much of the growing season.

In the Chicago Fed district, farmland values in the latest quarter dropped in major corn-producing states like Illinois, Iowa and Indiana compared with year-ago levels, while land values in Wisconsin increased slightly and were unchanged in Michigan. The fourth quarter of 2014 marked the first time since the third quarter of 2009 that cropland values in the district dropped overall compared with a year earlier.

“Lower corn and soybean prices have been primary factors contributing to the drop in farmland values,” David Oppedahl, senior business economist at the Chicago Fed, wrote in Thursday’s report, adding that for 2015, “district farmland values seem to be headed lower.”

While exceptional returns for livestock producers in 2014 helped blunt the impact of falling crop prices on land values, Mr. Oppedahl said, the trend may come to a halt if prices for animal feed grains stabilize somewhat this year.

Meanwhile, the St. Louis Fed said farm income, household spending by farms and expenditures on farm equipment declined in its region. Midwestern bankers expect a continued slowdown in the current quarter in those three categories.

“It is very difficult for farmers to buy farmland and new equipment with corn prices in the $3.50 range,” said one Missouri lender in the St. Louis Fed report.

Bankers in the Midwest also noted a rise in financial strain for crop farmers in the latest quarter. Lenders in the Chicago region reported a dramatic increase in demand for farm loans compared with year-ago levels, with an index of loan-demand reaching the highest level since 1994. Farm loan repayment rates also were “much weaker,” in the fourth quarter of 2014 compared with the same period a year earlier, the bank said, with an index of loan-repayment falling to the lowest level since 2002.

As if that’s not bad enough, just yesterday, Joe Winterbottom and P.J. Huffstutter of Reuters reported, Rent walkouts point to strains in U.S. farm economy:

Across the U.S. Midwest, the plunge in grain prices to near four-year lows is pitting landowners determined to sustain rental incomes against farmer tenants worried about making rent payments because their revenues are squeezed.

Some grain farmers already see the burden as too big. They are taking an extreme step, one not widely seen since the 1980s: breaching lease contracts, reducing how much land they will sow this spring and risking years-long legal battles with landlords.

The tensions add to other signs the agricultural boom that the U.S. grain farming sector has enjoyed for a decade is over. On Friday, tractor maker John Deere cut its profit forecast citing falling sales caused by lower farm income and grain prices.

Many rent payments – which vary from a few thousand dollars for a tiny farm to millions for a major operation – are due on March 1, just weeks after the U.S. Department of Agriculture (USDA) estimated net farm income, which peaked at $129 billion in 2013, could slide by almost a third this year to $74 billion.

The costs of inputs, such as fertilizer and seeds, are remaining stubbornly high, the strong dollar is souring exports and grain prices are expected to stay low.

How many people are walking away from leases they had committed to is not known. In Iowa, the nation’s top corn and soybean producer, one real estate expert says that out of the estimated 100,000 farmland leases in the state, 1,000 or more could be breached by this spring.

The stakes are high because huge swaths of agricultural land are leased: As of 2012, in the majority of counties in the Midwest Corn Belt and the grain-growing Plains, at least 40 percent of farmland was leased or rented out, USDA data shows.

“It’s hard to know where the bottom is on this,” said David Miller, Iowa Farm Bureau’s director of research and commodity services.

SIGNS OF TROUBLE

Grain production is, however, unlikely to be affected in any major way yet as landowners will rather have someone working their land, even at reduced rates, than let it lie fallow.

But prolonged weakness in the farm economy could send ripples far and wide: as farms consolidate, “there would be fewer machinery dealers, fewer elevators, and so-on through the rural economy,” said Craig Dobbins, professor of agricultural economics at Purdue University.

Possibly also fewer new farmers.

Jon Sparks farms about 1,400 acres of family land and rented ground in Indiana. His nephew wants to return to work on the farm but margins are tight and land rents high. Sparks cannot make it work financially.

“We can’t grow without overextending ourselves,” Sparks said. “I don’t know what to do.”

Landowners are reluctant to cut rents. Some are retirees who partly rely on the rental income from the land they once farmed, and the rising number of realty investors want to maintain returns. Landlords have also seen tenants spend on new machinery and buildings during the boom and feel renters should still be able to afford lease payments.

“As cash rent collections start this spring, I expect to see more farm operators who have had difficulty acquiring adequate financing either let leases go or try and renegotiate terms,” said Jim Farrell, president of Farmers National Co, which manages about 4,900 farms across 24 states for land-owners.

Take an 80-acre (32 hectare) farm in Madison County, Iowa, owned by a client of Peoples Company, a farmland manager. The farmer who rented the land at $375 an acre last year offered $315 for this year, said Steve Bruere, president of the company. The owner turned him down, and rented it to a neighbor for $325 — plus a hefty bonus if gross income tops $750.

There are growing numbers of other examples. Miller, of the Iowa Farm Bureau, said he learned about a farmer near Marshalltown, in central Iowa, who had walked away from 650 acres (263 hectares) of crop ground because he could not pay the rent. Just days later, he was told a north-central Iowa farmer breached his lease on 6,500 acres.

COURTS OR LOANS

Concern about broken leases has some landlords reviewing legal options, according to Roger A. McEowen, director of the Iowa State University Center for Agricultural Law and Taxation. His staff began fielding phone calls from nervous landowners last autumn.

One catch is that many landlords never thought to file the paperwork to put a lien on their tenants’ assets. That means landowners “can’t go grab anything off the farm if the tenant doesn’t pay,” McEowen said. “It also means that they’re going to be behind the bank.”

Still, farmers could have a tough time walking away from their leases, said Kelvin Leibold, a farm management specialist at Iowa State University extension.

“People want their money. They want to get paid. I expect we will see some cases going to court over this,” he added.

To avoid such a scenario, farmers have begun turning to banks for loans that will help fund operations and conserve their cash. Operating loans for farmers jumped 37 percent in the fourth quarter of 2014 over a year ago to $54 billion, according to survey-based estimates in the Kansas City Federal Reserve bank’s latest Agricultural Finance Databook.

Loans with an undefined purpose — which might be used for rents, according to the bank’s assistant vice-president Nathan Kauffman — nearly doubled in the fourth quarter of 2014 from a year earlier to $25 billion.

Total non-real estate farm loan volumes jumped more than 50 percent for the quarter, to $112 billion.

“It’s all about working capital and bankers are stressing working capital,” said Sam Miller, managing director of agricultural banking at BMO Harris Bank. “Liquidity has tightened up considerably in the last year.”

These articles highlight two things: First, the bubble in farmland is bursting and second, when it bursts and farmers walk away from their leases, it could potentially mean costly and lengthy court battles pitting landowners (ie. endowment funds and public pension funds like CPPIB and PSPIB which also invests in farmland) against farmers. That doesn’t look good at all for pensions.

All this to say, while it’s really cool following Harvard’s mighty endowment into timberland and farmland, when you come down to it, managing and operating farmland is a lot harder than it seems on paper and the risks are greatly under-appreciated. Add the potential of global deflation wreaking havoc on all private market investments and you understand why I’m skeptical that farmland is a good fit for pensions, even if they invest for the long, long run.

 

Photo by  Mark Robinson via Flickr CC License

Kentucky Pension Bond Proposal Clears House

kentucky

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.

 

“Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Ky_With_HP_Background.png#mediaviewer/File:Ky_With_HP_Background.png