August 13, 2015
Topeka Kansas sold $1 billion in bonds Wednesday in an effort to bolster the financial health of its pension system for teachers and government workers, a day after a major rating agency said the move will "do little" to help while increasing the state's financial risks.
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.
But a report last year from the Center for Retirement Research at Boston University said such bonds reduce a state or local government's financial flexibility. Moody's Investors Service raised the same issue in a report Tuesday on the Kansas bonds, saying the state is replacing "soft" obligations with "hard" debt payments.
Moody's also said Kansas appeared to be using the bonds for "near-term budgetary relief." In authorizing the bonds earlier this year, lawmakers also trimmed back the state's contributions to public pensions over the next two years, providing less aggressive increases than previously planned.
Republican Gov. Sam Brownback and the GOP-dominated Legislature were seeking to avert a budget deficit following massive personal income tax cuts enacted in 2012 and 2013 at Brownback's urging in an effort to stimulate the economy. Trimming pension contributions helped; the state also raised sales and cigarette taxes.
"We see this as one of the indicators that the state is having trouble balancing its budget," said Dan Seymour, a Moody's assistant vice president and its lead analyst for Kansas.
The pension system projects that the benefits due retirees over the next 18 years were 62 percent funded at the end of last year, with anticipated revenues and investment earnings falling $9.47 billion short. A 2012 law committed the state to greater contributions and revised benefits for new employees so that the gap would be eliminated in 2033.
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 law authorizing the bonds also caps the interest the state can pay to investors at 5 percent. The state agency handling the bonds said the overall interest cost is 4.68 percent.
The pension system assumes its investments will earn 8 percent over time. The average for the past 25 years is 8.5 percent, said Alan Conroy, the pension system's executive director. The state issued $500 million in pension bonds in 2004 and is coming out ahead.
"I don't see any downside," Conroy said.
The pension system's investment earnings can fluctuate year to year. For the 12 months ending in June, Conroy said, they were 3.8 percent, though the average for the previous five years was 11.7 percent.
In a March report, the Westport, Connecticut-based Municipal Market Analytics Inc. described pension bonds as "always the wrong choice." Matt Fabian, a partner, said Tuesday that such bonds allow a state to take a "holiday" from pension contributions.
"They're essentially selling bonds and buying stocks," he said. "And they're buying stocks at what may be the top of the market."
Moody's and Standard & Poor's rated the bonds in line with the state's overall credit ratings but one notch below because lawmakers must appropriate money annually for bond payments. Still, the latest Moody's report said the bonds represent "a riskier strategy than the simpler alternative of making larger annual pension contributions."
AP Business Writer Bernard Condon in New York also contributed to this report.
Originally published at: http://www.bonnersprings.com/news/2015/aug/13/kansas-officials-defend-pension-bonds-after-moodys/