Kansas officials have reason to hope Greece doesn’t sort out its debt impasse right away.
The state plans to sell $1 billion of taxable bonds by mid-August to shore up its main pension fund, said Jim MacMurray, senior vice president of the Kansas Development Finance Authority, which is handling the sale. Kansas can’t sell the 30-year debt for yields above 5 percent, according to state law.
It may be running out of room. Similar bonds that Kansas sold in 2004 with insurance have traded recently at less than a half percentage point below that level.
Greece’s standoff with creditors over austerity measures such as pension cuts is helping keep Kansas’ bond plan alive. The euro area tension is holding down interest rates by stoking demand for U.S. Treasuries even as bets build that the Federal Reserve is getting closer to raising borrowing costs.
“We have interest rate risk until we can get to market,” MacMurray said. “It’s certainly possible we could get hit by higher rates.”
Kansas’ pension system, which covers 290,000 members in multiple funds, had two-thirds of the $24.8 billion it needed to pay promised benefits as of June 2014. Under Republican Gov. Sam Brownback, the state opted for a controversial strategy to bolster the biggest of the plans, the Kansas Public Employees Retirement System, by borrowing and investing the proceeds with the hope of earning a higher return.
In January, a group of state and local government officials warned against the practice. The Government Finance Officers Association called it “speculative” and said it may backfire if investments don’t pan out.
The approach hinges on market timing, according to a 2014 study by the Center for Retirement Research at Boston College. While pension bonds have been profitable because of stock gains since the recession, those sold in other periods, such as before the 2008 crash, lost money, the study found.
Puerto Rico’s sale of about $3 billion of the debt in 2008 failed to strengthen its pension fund, according to a report from Janney Capital Markets in Philadelphia.
“It’s usually a symptom of stressed financing when a city or state funds its pensions with long-term debt,” said Alan Schankel, managing director at Janney. “There’s no assurance they will end up in a better place.”
Kansas’ 2004 bond issue has improved pension funding, according to the Kansas Public Employees Retirement System. The $500 million sale generated about $181 million of returns in excess of the borrowing cost as of Dec. 31.
The new debt would give KPERS about 66 percent of the assets for future benefits by year’s end, up from 60.7 percent in March, according to legislative documents. It would cut the estimated shortfall to $6.28 billion from $7.26 billion.
“Bond proceeds could have an immediate positive effect on KPERS funded ratio and unfunded actuarial liability,” said Kristen Basso, a spokeswoman for the system.