Moody’s Investors Service released a report Tuesday warning that the $1 billion in pension bonds, which Kansas will put on sale this week, will do little to solve the state’s long-term pension challenges.
The state plans to invest the proceeds from the bonds and is betting that the profits will surpass the long-term interest on the bonds. Issuing bonds will also enable the state to put $1 billion in its underfunded pension system, allowing the state to scale back its employer contribution this year and “achieve short-term budgetary relief,” in the words of Moody’s.
The report was released a day before the bonds go on sale, which will do little to solve the challenges surrounding Kansas’ poorly-funded state-administered pension plan, according to Moody’s.
The rating agency said the state was exchanging a “soft” liability (unfunded pensions) for a “hard” one (appropriation debt) by issuing the bonds.
“Debt represents an inflexible fixed cost that cannot be renegotiated or modified without defaulting,” the report states. “By contrast, an unfunded pension liability can sometimes be modified through benefit reforms or funded over a longer timeline without defaulting.”
Gov. Sam Brownback’s budget director, Shawn Sullivan, blamed the pension system’s underfunding on previous administrations.
“It is unfortunate that previous administrations chose to underfund KPERS,” Sullivan said in an e-mail, referring to the Kansas Public Employees Retirement System. “Governor Brownback and the Legislature have invested hundreds of millions more into the pension system as compared to the pre-recession state contribution levels.”
Sullivan noted that the state has not met its actuarial required contribution rate since 2000 but said it is on pace to do so in fiscal 2020 under the current plan.
Senate Minority Leader Anthony Hensley, D-Topeka, who voted against offering bonds, said the report is “proof of what some of us were saying all along that it’s too risky of a proposition.”
The report also notes that the pension fund will remain “poorly funded, even with this bond deal.”
The state’s unfunded pension liability stands at more than $7 billion, and the state does not hope to achieve full pension funding until 2033.
Senate Vice President Jeff King, R-Independence, said that “anyone who thinks that issuing bonds solves all the problems in the pension system is wrong, but none of us who have advocated for it have ever said that.”
King noted that the state made a similar move under Gov. Kathleen Sebelius – issuing bonds and investing the proceeds in the stock market – and it paid off.
“Basically what we’re doing is refinancing a debt of the state, and we’re refinancing it in a way that history has shown is likely to save hundreds of millions of taxpayer dollars over the coming decades,” King said. “If you refinance credit card debt through a lower-interest loan, you’re not increasing your debt. You’re just handling it in a smarter way.”