Last week state officials gave the go-ahead to issue $1 billion in bonds in an effort to boost the state’s pension program. WE’VE BACKED ourselves into a corner with the pension obligation bonds. The state needs the cash infusion to fund its retirement program. Because it’s a 30-year loan, much of the burden will be borne by our children.
The hope is that the state will earn more in investments than what it will owe to retire the 30-year debt.
Officials are betting it will earn an average 8.9 percent on the investment of the bond proceeds. The pension-obligation bonds are a unique, but small sliver, of the municipal bond market.
Legislators set a 5 percent cap on what the state will be willing to pay in interest on the loan. They want the sale on the municipal bond market to be in one lump sum, rather than piecemeal, guaranteeing one rate on the issuance.
KPERS faces a $9.8 billion shortfall to fund its obligations to teachers and government workers. Lawmakers cut funding to the pension program in the expectation of the sale of the bonds.
Two scenarios could put a hitch in plans.
First is that interest rates do not stay below the 5 percent threshold. Interest rates are currently 4.95 percent.
The second is that as the state takes on more debt its credit rating could be downgraded — on top of a downgrade in August 2014 by both Moody’s Investors Service and Standard & Poor’s — and effectively scare off potential investors.
Critics of the plan say the expected return on investment is unreasonable.
According to the Center for Retirement Research, four years out from the 2009 recession, the average return on similar pension bond plans was 1.5 percent annually since 1992 — far below that projected by state officials.
Because the market is prone to ups and downs — including full out recessions — nothing is certain over the course of the 30-year investment plan. Historical returns are the best guide.
— Susan Lynn
Returns on bond sale a gamble; puts KS deeper in debt
