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Former NY Lieutenant Gov: Kansas’ Pension Bond Plan a “Dreadful Idea”

Kansas Gov. Sam Brownback last month proposed issuing $1.5 billion in bonds to help cover the state’s pension funding shortfall.

The bonds would allow Brownback to go through with another proposal – lowering state payments to the pension system by $39 million in fiscal year 2015-16 and by $92 million in fiscal year 2016-17.

But pension bonds don’t come without risks. Over the weekend, a former New York lieutenant governor called Brownback’s plan “a dreadful idea”. From the Wall Street Journal:

Richard Ravitch, the former New York lieutenant governor who helped save New York from bankruptcy in the 1970s and now sits on the board of The Volcker Alliance, called Kansas’ plan “a dreadful idea.”

“If you cover current obligations by borrowing money, you’re on an unstable course,” said Mr. Ravitch.

There are other criticisms of pension obligation bonds, as well. The states and municipalities that issue them, for example, are frequently in ill-equipped to deal with the fallout if pension investment returns don’t exceed bond interest rates.

From the Wall Street Journal:

The state would make a decades-long bet that pension-fund returns will exceed current interest rates for taxable municipal bonds. Kansas officials said interest rates near historic lows make the bonds an attractive way to help manage retirement obligations.

If examined from the stock market highs at the end of 2007, such deals returned an average of 0.8%, the Center [For Retirement Research] said in a report last year. By 2009, however, most pension bonds were a net drain of -2.6%. Thanks to stock market gains following the recession, however, most of the deals were back in positive territory by 2014, returning an average of 1.5%.

Pension-bond deals made at the end of the market run-up in the 1990s, or right before the crash in 2007, have produced negative returns, the report said. Many of the bonds have a 30-year lifespan, meaning the final results won’t be known for years.

“This should be a tool in a well-functioning governments arsenal,” said Alicia Munnell, the Center’s director. “Unfortunately, those that use them tend to be cash-strapped and desperate.”

Read the Center for Retirement Research report on pension obligation bonds here.

Photo credit: Lendingmemo

Kansas Retirees Rally at Capitol Against Gov.’s Plan to Cut State Pension Contributions

Members of the Kansas Public Employee’s Retirement System (KPERS) gathered at the state capitol on Wednesday to rally against Gov. Sam Brownback’s plan to cut state contributions to the pension system.

Kansas is facing a $340 million budget shortfall in fiscal year 2014-15.

To address the shortfall, Brownback plans to slash state pension contributions by $58 million this year.

Additionally, the state would issue $1.5 billion in bonds, with money going to the pension system’s investment fund.

Pension officials have warned that the plan could have long-term consequences.

The Topeka Capital-Journal has more from the rally:

Dennis Phillips, chairman of the Kansas Coalition of Public Retirees, said lawmakers had a responsibility to deliver financial certainty to 280,000 Kansas teachers, judges, firefighters and others participating in the retirement program. Sidestepping state payments to KPERS doesn’t make sense, he said.

“We need your support,” Phillips told retirees. “The governor wants to remove $60 million from KPERS this year. It is real money.”

“How many more of these payments will be deferred?” said Rep. Ed Trimmer, D-Winfield.

House Minority Leader Tom Burroughs, D-Kansas City, said actions undermining integrity of the system betrayed people who dedicated themselves to government service.

“Your pension plan, KPERS, was our commitment to you for standing up and taking these jobs,” he said.

Kansas PERS was 56.4 percent funded as of the end of 2013.

Photo credit: “Seal of Kansas” by [[User:Sagredo|Sagredo]][[User talk:Sagredo|⊙☿♀♁♂♃♄]] – http://www.governor.ks.gov/Facts/kansasseal.htm. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Seal_of_Kansas.svg#mediaviewer/File:Seal_of_Kansas.svg

Video: Kansas Treasurer Talks PERS Funding, Reforms

Here’s Kansas Treasurer Ron Estes talking about the condition of the state’s Public Employees Retirement System, the state’s 2012 reform law and his support for Gov. Brownback’s new proposal to issue $1.5 billion in bonds to go toward pension funding.

Kansas Treasurer Voices Support For Governor’s Pension Bond Plan

Kansas Treasurer Ron Estes is backing Gov. Sam Brownback’s plan to issue $1.5 billion in bonds to go towards funding the state’s Public Employees Retirement System.

Pension officials told Kansas lawmakers last week that such a decision, coupled with Brownback’s plan to delay pension payments, could end up costing the state almost $4 billion.

From the Topeka Capital-Journal:

The gambit put forward by Gov. Sam Brownback carries risk, the state’s treasurer said in an interview, but the state government’s general budget needs infusion of $137 million that would be available over the next two years by adjusting the Kansas Public Employees Retirement System. Kansas’ general operating deficit over the next 18 months has been estimated to be $700 million.

“The changes the governor suggests will help address the state’s budget shortfall while keeping KPERS in line with the pension reform plan passed by the 2012 Legislature,” Estes said.

Three years ago, legislators and Brownback committed the state to higher contributions to KPERS and other system reforms to chip away at a $9.8 billion funding gap on scheduled payouts to retirees through 2033.

Under the governor’s latest plan, the break-even point for the pension system would be pushed to 2043. The cost of delaying resolution of the deficit in KPERS could cost the state as much as $9 billion — nearly double the existing unfunded liability — when carried forward over three decades.

“You can lower your payments now, but if you add 10 years of payments, you’re going to pay more,” said Alan Conroy, executive director of KPERS.

“There are pros and cons to it,” said Estes, who is on the KPERS board of directors. “It’s a reasonable burden.”

Brownback also urged legislators to authorize issuance of $1.5 billion in bonds to infuse the pension system with capital that would be invested in the markets. The bonds might cost the state less than 5 percent, Estes said, while the average rate of return in the KPERS’ portfolio is about 8 percent.

“The bonding is a great idea,” he said. “We can take that $1.5 billion and invest it with other KPERS’ assets and start making money.”

Brownback is planning on delaying state payments to the pension system by $39 million in fiscal year 2015-16 and by $92 million in fiscal year 2016-17.

Kansas Pension Officials: State’s Plan to Delay Pension Payments Could Cost Billions in Long-Run

Kansas Gov. Sam Brownback in December diverted a $58 million payment from the pension system and used the money to plug holes in the state’s general budget.

The governor is seeking to delay more state payments to the pension fund, and is also looking to offset some of the costs by issuing pension obligation bonds.

But pension officials told lawmakers Tuesday that such a decision could end up costing the state between $3.7 billion and $9 billion in the long run.

From the Kansas City Star:

Changes to the state’s pension system proposed by Gov. Sam Brownback could cost Kansas $3.7 billion in the long run, lawmakers learned Tuesday.

The governor seeks to delay payments intended to shore up the state’s pension system to save money in the short term.

The Kansas Public Employees Retirement System faced an unfunded liability of $9.8 billion at the beginning of 2014. The state was on pace to pay it down to zero by 2033 because of reforms enacted during Brownback’s first term.

Instead, Brownback proposed Friday to pay down the unfunded liability more slowly, by 2043, to save money during the ongoing state budget crisis.

“It’s like the mortgage on your house. If you pay less, you’re going to pay longer and you’re going to pay more,” Alan Conroy, the executive director of KPERS, told the House Appropriations Committee.

The delay would increase costs overall by $9.1 billion. But Brownback proposes issuing $1.5 billion in bonds, and the profits from the interest on those bonds would partially offset that cost.

Rep. Kathy Wolfe Moore, a Kansas City, Kan., Democrat, said the state was undoing the progress it had made in reforming the pensions system.

“It costs us $9 billion with a B (to enact the governor’s plan). … So we’re doubling what we have now? We’re doubling our unfunded actuarial liability?” Wolfe Moore said. “We’re going in exactly the wrong direction as far as I can see.”

Kansas PERS was 56.4 percent as of the end of 2013.

Kansas Gov. Proposes Issuing $1.5 Billion in Bonds for Pension Funding

Kansas Gov. Sam Brownback, looking for ways to improve state pension funding after he cut $60 million from Kansas’ annual contribution, is now proposing issuing $1.5 billion of bonds to help cover the pension shortfall.

From Chron.com:

Gov. Sam Brownback is proposing that Kansas issue $1.5 billion in bonds and lengthen its schedule for closing a long-term funding gap to lower annual costs tied to pensions for teachers and government workers.

The Republican governor outlined the measures Friday. Brownback described escalating annual public pension costs as a long-term concern.

The state has committed to additional spending to bolster the long-term financial health of the Kansas Public Employees Retirement System. Benefits are only 60 percent funded through 2033, but the commitments would help close the $9.8 billion shortfall by then.

Brownback proposed extending the payoff period to 2043.

The bond funding would go to the Kansas Public Employees Retirement System (PERS).

The success of the plan depends on pension investment returns exceeding annual bond payments.

The state’s Budget Director, Shawn Sullivan, says he’s confident that will happen.

Kansas Lawmakers React to Governor’s Plan to Cut State Pension Contribution

Earlier this month, Kansas Gov. Sam Brownback announced his plan to cut the state’s annual pension payment by around $60 million and use the money to plug budget shortfalls elsewhere.

Several prominent lawmakers have now given their reactions to the proposal. From Salina.com:

[Steven] Johnson, R-Assaria, who is chairman of the House Pensions and Benefits Committee, was “not happy” with Tuesday’s proposal by Gov. Sam Brownback to cut the state’s pension contribution this year by $40 million as part of a plan to close a $280 million shortfall in the state budget.

And he’s not alone, even among Republicans.

“There’s no easy solution,” Johnson said Wednesday, “but I’m not happy with what they’re doing with KPERS.”

[…]

Late Wednesday afternoon, Kansas Treasurer Ron Estes, who campaigned with Brownback across the state just before the November election, released a statement critical of the planned KPERS cuts.

“While I understand the need to re-balance the budget in light of unexpected shortfalls, the decision to delay state contributions to our underfunded pension system is disappointing,” Estes wrote in the statement. “By delaying action now, we run the risk of KPERS consuming an even larger amount of our state’s budget at the expense of other vital state services to Kansans in the future.”

Senate Vice President Jeff King, R-Independence, who led KPERS reform in the Senate, said, “Over the last four years, Kansas has become the model for responsible pension reform. We inherited a pension system that was going broke and returned it to fiscal health. By raiding the KPERS fund instead of continuing prudent reform, Gov. Brownback is threatening to undo all of the hard-fought gains that we have made.”

The state’s Senate Minority Leader also weighed in. From the Topeka Capital-Journal:

Senate Minority Leader Anthony Hensley, D-Topeka, rejected the idea Brownback is protecting education funding by cutting KPERS instead. The governor has previously counted KPERS contributions when touting a high level of education spending under his administration. During the campaign, Brownback highlighted an overall increase of $270 million in education funding since 2011, a figure that included KPERS contributions.

“I would argue then, using his logic, that he’s actually cutting education,” Hensley said. “It’s so inconsistent, or downright contradictory, to make that kind of argument.”

Kansas PERS manages over $14 billion in assets.

Photo credit: “Seal of Kansas” by [[User:Sagredo| – http://www.governor.ks.gov/Facts/kansasseal.htm. Licensed under Public Domain via Wikimedia Commons

Kansas Seeks to Study Pension Privatization

Kansas Gov. Sam Brownback’s team is reportedly exploring options to improve the long-term sustainability of the state’s pension systems.

One option on the table: privatization.

From the Associated Press:

Two top aides to Republican Gov. Sam Brownback proposed Friday that Kansas study privatizing the pension system for teachers and government workers.

Budget Director Shawn Sullivan and Secretary of Administration Jim Clark told a joint legislative committee on pensions that “reform options” for bolstering the public pension system’s long-term health should be examined. Their list included converting pension benefits into annuities managed by a private insurer.

“It’s an idea worth pursuing,” Sullivan said after presenting the proposal to lawmakers.

The committee urged Brownback’s aides to gather more information about private companies’ experiences with such moves and present it once legislators open their next annual session Jan. 12.

[…]

Clark said with converting pension obligations into annuities, a private company assumes the long-term financial risks for a fee, while the state can provide competitive benefits at a lower cost.

At least one lawmaker and one union leader weighed in on the idea. Reported by AP:

Rep. Steve Johnson, an Assaria Republican, said the idea has merit, but, “I am not optimistic that there would be a buyer of that liability at a lower cost.”

And Rebecca Proctor, interim executive director of the largest union for Kansas government employees, said private companies’ need for profits would compete with the pension system’s drive “to generate benefits for employees.”

“Any time you put a profit motive in a state service, it’s a problem,” she said.

Last week, Gov. Brownback proposed cutting the state’s pension payment by $41 million to plug budget holes elsewhere.

Photo credit: “Seal of Kansas” by [[User:Sagredo|. Licensed under Public Domain via Wikimedia Commons

Kansas Treasurer Considers Pension Obligation Bonds Amidst State Plans to Cut Annual Pension Payment

Kansas Gov. Sam Brownback announced plans this week to cut nearly $60 million from the state’s annual pension contribution and use the money to plug budget holes elsewhere.

In light of that news, Kansas Treasurer Ron Estes is considering issuing bonds to help fund the state’s pension system.

From Bloomberg:

Brownback, a Republican who starts his second term in January, last week proposed shortchanging the state’s pension contributions by $58 million to close a $280 million budget hole caused in part by tax cuts the governor championed. Kansas, with the fifth-weakest pension system among U.S. states, had its issuer ratings downgraded by Standard & Poor’s and Moody’s Investors Service this year.

To close a $7.35 billion funding shortfall, the state needs to keep commitments that were part of a 2012 pension overhaul, said Estes, a Republican who also won re-election last month. The plan called for more funding from the state, including revenue from casinos it owns, and raised the amount employees pay.

“We need to keep working on our pension reforms passed two years ago or we’ll fall further behind,” Estes said in an interview from Topeka.

Kansas can take advantage of interest rates close to five-decade lows to raise cash, increase the funding level and create fixed payments, Estes said. The state issued $500 million of pension bonds in 2004; a proposal to sell another round stalled in the legislature last year.

[…]

The [Kansas PERS] system supports issuing bonds or any measure that boosts its funding, said Kristen Basso, a spokeswoman.

“Pension bonds would reduce our unfunded liability and improve our funded ratio,” she said in an e-mail.

But the bonds aren’t a problem-free solution. From Bloomberg:

The debt, which is typically taxable, carries risk. The strategy is to invest the proceeds, usually in stocks, and earn more than it costs to repay bond investors. The approach can backfire if issuers borrow when equities are at historic highs, said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College. The S&P 500 Index this week posted its best two-day gain in more than three years.

“There are instances where they can work, but they can be risky financial tools for cash-strapped borrowers,” Aubry said in a phone interview. “They’re gambling on the market and should be undertaken by those with the appetite for the risk and the ability to absorb the risk.”

Kansas’ state pension systems were collectively 56.4 percent funded as of 2013.

Photo credit: “Seal of Kansas” by [[User:Sagredo|. Licensed under Public Domain via Wikimedia Commons