Pension bet not paying off yet

KPERS earned only 0.2 percent on its investments last year. The interest rate on the $1 billion in pension bonds is 4.68 percent.
KPERS earned only 0.2 percent on its investments last year. The interest rate on the $1 billion in pension bonds is 4.68 percent.

So far, not so good for the state’s $1 billion pension fund bet. And unless investment returns improve, Kansas taxpayers will be the big losers.

The Legislature and Gov. Sam Brownback approved the state issuing $1 billion in pension bonds last year. The proceeds went to the Kansas Public Employees Retirement System, and the state is responsible for paying back the bonds plus interest.

The bet – which Governing magazine described as a “big, scary gamble” – was that KPERS would earn more by investing the $1 billion than the state would have to pay in interest costs over the 30-year life of the debt.

That wasn’t the case last year.

KPERS officials reported this week its investments earned only 0.2 percent during the 2015 calendar year. The interest rate on the bonds is 4.68 percent.

One down year isn’t a disaster. KPERS has historically averaged about an 8.5 percent return on its investments, so over time it likely will cover the cost of borrowing. That’s certainly what Brownback and lawmakers are betting.

But it also is possible that the stock market could drop. When the state issued the bonds last year, Matt Fabian of Municipal Market Analytics Inc. warned that “they’re buying stocks at what may be the top of the market.” A spokesman for Moody’s Investors Service said that Kansas is “essentially placing a wager.”

The other concern was that the state exchanged a “soft” liability (unfunded pensions) for a “hard” one (appropriation debt). In other words, the state has to make the bond payments even if it’s low on money, as it is now.

But lawmakers and Brownback already found a way around that budget squeeze. Last fiscal year they delayed making the state’s $100 million quarterly payment to KPERS.

That payment, plus 8 percent interest, is supposed to be made by June 30, 2018. But several lawmakers expressed doubts this week that the state will make good on that promise.

“I’m not optimistic it will be paid back within the coming year or by that time frame,” said Rep. Steven Johnson, R-Assaria.

The payment delay undermines the good work Brownback and the Legislature have done to reduce KPERS’ unfunded liability.

As of last Dec. 31, the KPERS fund was valued at $17.4 billion, and its long-term liabilities were $25.9 billion. That 67.1 percent funding ratio is significantly less than the 85 percent benchmark that most analysts consider healthy.

But the 67.1 percent is an improvement from the 62.3 percent ratio at the end of 2014 – due primarily to the $1 billion in borrowing. However, that doesn’t yet account for the $100 million payment delay.

KPERS has seen improved investment returns this year, so the big bet may yet pay off. Taxpayers better hope it does.