TOPEKA – Kansas is moving closer to issuing $1 billion or more in bonds to bolster its pension system for teachers and government workers, even though many lawmakers see it as financially risky and Gov. Sam Brownback acknowledged Thursday, “I’d rather we weren’t doing this.”
The Republican governor is pushing the GOP-dominated Legislature to approve the borrowing as part of a larger plan to reduce annual pension costs and help balance the state budget for the fiscal year beginning July 1. The House and Senate have approved rival bills, and their negotiators expect to work on a compromise next week.
The Kansas Public Employees Retirement System is on track to close a projected $9.8 billion gap between revenues and the benefit costs from now until 2033, thanks to laws enacted in recent years. But those laws require increasing contributions to KPERS by the state, and Brownback argues that the payments will strain the budget.
The state faces its own projected budget shortfall of nearly $600 million for the next fiscal year, which arose after lawmakers aggressively cut personal income taxes in 2012 and 2013 at Brownback’s urging, hoping to stimulate the economy. Brownback’s own plan – issuing $1.5 billion in bonds and giving KPERS until 2043 to close its long-term funding gap – would lower the state’s costs in the next fiscal year by $40 million.
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But critics of Brownback’s proposal liken it to decisions by past governors and legislators over decades to short the state’s payments to KPERS, creating the long-term funding shortfall.
“I’d rather we weren’t doing this. I’d rather they’d put the money in, in the past, but we are where we are,” Brownback told The Associated Press. “We still have options, and this is one of them.”
The House approved its pensions bill Wednesday, 67-57. Its plan would authorize $1.5 billion in bonds, but it doesn’t assume that the schedule for closing the long-term funding gap will be stretched out.
The Senate passed its proposal last month on a 21-17 vote. Its bill calls for $1 billion in bonds and assumes KPERS takes until 2043 to close its long-term funding gap.
Both proposals wouldn’t allow the bonds to be issued unless the state paid 5 percent or less in interest to investors. The pension system expects its own investments to earn an average of 8 percent annually, long term.
Each chamber’s votes showed bipartisan misgivings about issuing bonds.
Critics worry that KPERS might not beat the interest-rate spread. And in a report last year, the Center for Retirement Research at Boston College said issuing bonds decreases financial flexibility, turning pension payments that can be modified into firm bond payments.
“We’re making a debt to pay a debt, and that’s fundamentally unsound,” Rep. Ed Trimmer, a Winfield Democrat, said during the House’s debate.
Supporters of this year’s proposals note that Kansas issued $500 million in pension bonds in 2004. The state is paying 5.39 percent interest, while KPERS has earned an average of 7.7 percent on its investments since then – even with the Great Recession of 2008-09.
House Pensions and Benefits Committee Chairman Steve Johnson, of Assaria, told his colleagues that Kansas might pay as little as 4.4 percent interest on new pension bonds.
“Kansas has done this before, under less favorable conditions,” Senate pensions committee Chairman Jeff King, an Independence Republican, said Thursday. “We have virtually historically low investment rates.”