Originally published by Kansas Reflector on March 6, 2021
TOPEKA — Kansas retiree advocate Ernie Claudel enthusiastically supported taking advantage of low interest rates to issue $1 billion in bonds to infuse investment cash into the Kansas Public Employees Retirement System.
“This appears to be an ideal time to attempt an issuance of the proposed bonds,” said Claudel, who works with the Kansas Coalition of Public Retirees and the Kansas Association of Retired School Personnel. “It would also seem to be the proper time to use part of this proposed funding for a modest benefit increase for your KPERS’ retirees and beneficiaries.”
The Kansas House didn’t buy the cost-of-living adjustment suggestion, but overwhelmingly approved the concept of $500 million to $1 billion in bonding — depending on where interest rates stand — to refinance a portion of the pension system’s unfunded liability.
The bond strategy in House Bill 2405 was designed to lower the cost over a 30-year period of addressing a $6 billion unfunded liability in the state government worker and teacher portion of KPERS. Proceeds from bond sales would be injected into KPERS’ investment portfolio in anticipation earnings exceeded the borrowing debt and boosted the bottom line of pension system, said Rep. Steve Johnson, an Assaria Republican and chairman of the House Insurance and Pensions Committee.
“Thirty years gives us a better chance to be confident in achieving our expected rate of return,” Johnson said. “KPERS is also very efficient in the way they invest the money. They have a solid track record for investing it.”
Rep. Vic Miller, a Topeka Democrat, said decisions in 2004 and 2015 by the Legislature to borrow large amounts of money through bonding on behalf of KPERS were risks that paid off. There is merit in repeating the process, he said.
“In its simplest form, H.B. 2405 merely employs one of the oldest and most effective methods of getting rich in America — borrowing money and investing it to earn a profit,” he said. “With interest rates at record lows, now is the perfect time to again make a smart investment using the strength of our KPERS trust fund borrowing ability to do so.”
In recent years, Kansas lawmakers have been convinced to nudge the funded obligation ratio in this sector of KPERS closer to the target of 80%. A new bond issue of $1 billion could quickly shift that ratio from the current 71.9% to as high as 76.7%, said Shawnee Rep. Cindy Neighbor, the top Democrat on the pension committee.
“Without this,” she said, “we’re not going to get there for awhile.”
Under the bill passed this week by the House on a vote of 117-6, the state would issue $1 billion in bonds for KPERS if the interest rate was 3.5% or less. The borrowing cap would be lowered to $500 million if interest rates were between 3.5% and 3.75%. It’s possible those barriers could be raised in negotiations with the Senate on the bill, Johnson said.
Johnson said the state went for $500 million in bonds during 2004 and has generated $462 million in investment returns for the pension system. KPERS has benefitted because the state borrowed at 5.4% and earned more than that amount, he said.
In 2015, then-Gov. Sam Brownback signed a bill authorizing issuance of $1 billion in bonds, which has been a $272 million positive for KPERS. The interest rate cap on the 2015 bonds was set by the Legislature at 5%, but the actual rate of acquisition was 4.68%. Brownback’s original proposal was more aggressive. He wanted to bond $1.5 billion, but legislators dialed it back.
Alan Conroy, executive director of KPERS, said the pension’s board of trustees applauded legislative actions to improve sustainability of the system. When he addressed the House committee on the proposal in February, he said the debt service on a 30-year, taxable bond issue of $1 billion at 2.75% would be about $48 million annually. As rates creep upward, the annual obligation could surpass $50 million annually.
“The additional assets in the trust fund immediately improve the funded ratio of the state/school group,” Conroy said. “With the additional assets from the bond proceeds, the amount of state/school employer contributions required to extinguish the unfunded liability is less.”
If investment of bond proceeds mirrored the past, it could cut employer contributions to the pension system by approximately $1.4 billion over the 30-year life of the bonds. Past performance doesn’t guarantee future performance, Conroy said, but the previous two bond issues succeeded in adding value to the trust fund of KPERS.
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