By Gene Meyer | Kansas Reporter
Kansas pension fund gap could threaten credit rating
TOPEKA — Borrowing $5 billion on Wall Street to help refinance Kansas’ underfunded state pension system could raise costs to taxpayers as much as $325 million annually and lower the state’s credit ratings, a state panel heard Monday.
The 13-member Kansas Public Employee Retirement System Study Commission is considering a proposal to sell $5 billion in special pension obligation bonds to help plug the official $8.3 billion shortfall in funding pensions promised to about 158,000 teachers and state and local government workers.
The Legislature created the commission in 2011 to come up with specific proposals by January for overhauling Kansas Public Employee Retirement System, or KPERS, the largest pension plan in the state.
The proposed loan, which commission members must still vote on and legislators also must approve, would be Kansas’ second. The state similarly borrowed $500 million by issuing pension obligation bonds in 2004 and is repaying those with annual $34 million appropriations from the state’s general fund.
Kansas is one of about two dozen states that, along with 2,900 local governments, is using the special bonds to help meet pension obligations for workers, according to the Center for Retirement Research at Boston College in Massachusetts.
“There’s nothing academically wrong with them, but they do increase the risk to borrowers by transforming a soft obligation to pay into hard one that is less flexible, with specific dates and amounts to pay,” said Jean-Pierre Aubrey, the center’s associate director of state and local research.
Credit ratings agencies, such as Standard & Poor’s and Moody’s, aren’t worried about the possible $5 billion debt, said Jim MacMurray, vice president of the Kansas Development Finance Authority, which raises money in securities markets for capital improvement and other government long-term funding projects.
“The $325 million is about 5 percent of the $6.2 billion general fund revenue projected for this year, which is significant,” MacMurray told commission members. “But issuing pension obligation bonds (which are repaid with annual appropriations of state general fund revenue) pushes the issue to a whole different area, the state budget” he said.
MacMurray said that based on conversations he and other authority executives have had with rating agency underwriters, the agencies are concerned that Kansas’ general fund budget has become structurally imbalanced.
Kansas is required by statute to maintain a year-end cash reserve equal to 7.5 percent of its general fund budget, MacMurray said, “but we haven’t done that for years.”
Now, if Kansas sells the bonds and changes the pension fund obligation from a promise that legislators will address someday to a hard-and-fast promise to pay $325 million a year for the next 30 years, the underwriters may worry that the imbalance could worsen, even though the state has never missed payments.
“It’s likely, though not certain, that our credit ratings would be reduced as a result,” MacMurray said.
Standard & Poor’s rates Kansas debt as AA+, Moody’s rates it AA1 but cautions its next rating change could be lower. Both are the second highest ratings either agency awards. Only states that, unlike Kansas, automatically pull money out of general fund revenue to make bond payments instead of requiring legislators to vote whether to pay the money annually get higher ratings. Lower ratings also would require Kansas to pay higher interest rates to attract investors, which in this case would increase the state general fund costs to taxpayers.
“I’m surprised that issuing bonds to reduce debt the ratings agency already consider us obligated to pay would have a negative effect on our credit ratings,” said state Sen. Jeff King, R-Independence and a co-chairman of the study commission.
“Couldn’t we accomplish the same thing by simply appropriating the money?” King asked.
That still would not ease the underwriter’s concern over the structural imbalance, MacMurray said.
Finding a breakeven point, by reducing the $5 billion size of the proposed bond sales to some level that doesn’t harm Kansas’ credit rating, seems unlikely to work either, said state Sen. Laura Kelly, a Topeka Democrat.
“We do pay our debts, but we’re not so good at handling appropriations,” Kelly said.
KPERS study commission members are scheduled to meet early next month to vote on final proposals to offer the Legislature in January.
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