Kansas is expected to issue $1 billion in bonds to bolster its pension system for teachers and government workers after the Legislature authorized the debt.
Some lawmakers see the move as potentially risky, and the votes in the Republican-dominated Legislature were relatively close despite a push from GOP Gov. Sam Brownback.
The Senate approved the bill Thursday on a 23-16 vote, a day after the House passed it, 63-57. Brownback — who had proposed $1.5 billion in bonds — is expected to sign the bill, and supporters said the state should issue the debt starting this summer.
The Kansas Public Employees Retirement System would receive an infusion of cash, immediately narrowing a long-term gap in funding for retirement benefits. The pension system would invest the money and expects its investments to earn significantly more than the state would pay on the 30-year bonds.
“This is a very solid financial decision,” said Republican state Sen. Jim Denning, of Overland Park.
But there’s skepticism — including among teacher, state worker and retiree groups — because the move also is designed to help with the state budget by decreasing state contributions to public pensions by $64 million over the next two years.
A report last year from the Center for Retirement Research at Boston College said bonds decrease financial flexibility, turning pension payments that can be modified into set bond payments. The report also said underfunded plans and financially stressed governments typically issue bonds, often to lower annual costs.
“We’re incurring debt to pay debt,” state Sen. Laura Kelly, a Topeka Democrat who opposed the bill, said after Thursday’s vote. “When things are going well — we wouldn’t have even considered this.”
The bill limits the state to paying 5 percent or less in interest to bond investors, and the pension system expects to earn 8 percent annually on its investments the long-term.
The state issued $500 million in pension bonds in 2004, paying almost 5.4 percent in interest. The pension system’s investment earnings have averaged 7.7 percent annually since then, even with the Great Recession.
“It worked,” Brownback said during a Statehouse news conference before the Senate vote.
The pension system already was on track to close a projected $9.8 billion gap between revenues and benefit costs from now until 2033 under laws enacted in recent years that require increasing state contributions to pensions.
“We should have just left KPERS alone,” said Sen. Carolyn McGinn, a Sedgwick Republican who opposed the bonding bill.
The state must close a budget shortfall projected at nearly $600 million for the fiscal year beginning July 1. The gap arose after lawmakers, at Brownback’s urging, slashed personal income taxes in 2012 and 2013 to stimulate the economy.
The governor contends the increasing pension commitments would strain the budget. Both major parties agree that the pension system’s long-term funding gap arose because the state shorted its contributions to retirement benefits over decades.
“I don’t like the strategy,” Brownback acknowledged, referring to the bonding plan. “I wish the strategy were that we’d already put in plenty of money, into the pension system, but that’s not what’s happened, so you have to deal with where you are.”