Kansas Gov. Sam Brownback and other state officials are reviewing a financially risky measure that they contend could help protect pensions for tens of thousands of teachers plus city, county and state employees.
However, the Legislature should not quickly sign off on a scheme with such long-term consequences for taxpayers.
The plan is to borrow up to $1.5 billion and inject it into the shaky Kansas Public Employees Retirement System. That would strengthen the system’s balance sheet. Plus, the cash-strapped state could reduce the size of its general fund contributions into the retirement system for at least a few years.
But the 30-year bonds would create more debt for taxpayers long after Brownback has left office. Then there’s the big unknown: Would the rate of return on the bonds exceed the borrowing costs placed on taxpayers?
National experts have taken long and careful looks at the pension obligation bonds that Kansas is considering. A report by the nonpartisan Center for Retirement Research at Boston College in 2014 — while pointing to budget relief as a positive outcome of the bonds — also said “serious risks” made them less-than-desirable partly because they create inflexible debt for taxpayers.
That debt has to be be paid back every year, no matter how a government’s finances look. Detroit and Stockton, Calif., used pension obligation bonds to try to help shore up their pension systems. Both cities went bankrupt in part because of their bond debts.
Overall, governments in shaky financial condition are more prone to use the bonds. That’s certainly the case with Kansas, which is reeling from hundreds of millions of dollars in revenue shortfalls after Brownback’s income tax cuts took effect in 2013.
Experts also point out that, while overall returns for pension obligation bonds issued since 1992 are slightly on the positive side, a bad time to borrow the funds appears to be when the stock market is near record highs, as it is now.
Kansas officials note that $500 million in pension obligation bonds issued a decade ago are on the positive side of the ledger. But those bonds won’t be fully paid off for 20 more years. Plus, they obviously didn’t solve the pension plan’s chronic underfunding.
A better way to ensure KPERS’ solvency is to make sure the state collects enough tax revenue to meet its current and future obligations. Being fiscally prudent isn’t in the DNA of enough lawmakers in Topeka, however. That’s why they are now considering the dicey idea of burdening Kansas with up to $1.5 billion in new debt.