House Speaker Greg Stumbo and the Kentucky Teachers' Retirement System want the state to take advantage of low-interest rates by issuing up to $3.3 billion in bonds. KTRS would use the money to make investments generating a higher rate of return than the interest due on the bonds.
Over time, the theory goes, the resulting gains would help stabilize a plan that has just 53 percent of the assets it needs to meet future obligations and an unfunded liability of $12 billion, which will jump to $23 billion when new accounting rules kick in later this year.
Sounds great. If it's that simple, let's all borrow low, earn high and retire to a life of leisure.
Except it's not that simple, because financial markets can be fickle. Not to mention volatile.
Shortfalls in both KTRS and the troubled Kentucky Retirement Systems are largely the result of state budgets that have persistently failed to meet their obligations to those systems as Kentucky lurches from one revenue crisis to another.
That problem will only be solved with true reform that aligns our taxation system with the modern economy. Beyond that, it is hard to know where the problems lie since both systems maintain a shroud of secrecy over many of their investment decisions and management fees, as well as benefits that are paid out.
While everyone might hope for a market miracle to bail out the systems, the history of funding public pensions with bonds is not one that inspires confidence. Pension bonds were contributing factors in the municipal bankruptcies in Detroit and Stockton, Calif.
Despite years of big-time bond issues, Illinois' pension plan is not much better off than the Kentucky Retirement Systems, which provide pensions and health care for state and local government retirees. KRS has about 21 percent of the assets it needs to meet future obligations.
Stumbo is not proposing a bond issue for KRS because he says reforms enacted two years ago eventually will improve its situation.
Lexington issued about $130 million in bonds for its police and fire pension fund but only set things on the right path after a thorough reform of the system combined with a commitment to annual government contributions.
Even if you write the anecdotal horror stories off to bad timing or bad decisions by state or local government officials, the record of success for pension bonds is less than overwhelming.
The Center for Retirement Research at Boston College looked at 3,000 such bonds issued between 1986 and 2009 and found that only bonds issued "a very long time ago" or "during dramatic stock downturns" had a positive result.
In December, Jean-Pierre Aubry, assistant director for state and local research at the center, described pension bonds to Bloomberg as "gambling on the market" and said they "should be undertaken by those with the appetite for the risk and the ability to absorb the risk."
Kentucky lawmakers decided the state had the appetite and the ability to absorb the risk when they approved a $900 million bond issue for KTRS in 2010.
But $3.3 billion represents a major step up in the risk the state would have to absorb if borrowing low and earning high doesn't work out as hoped.