FRANKFORT — House Speaker Greg Stumbo filed a bill Friday that would authorize the state to borrow $3.3 billion through bonded debt to prop up the Kentucky Teachers' Retirement System.
If the bonds are issued as planned next year, Stumbo said, the state can afford to make its full recommended contribution to KTRS for eight consecutive years, after which the $18 billion pension and insurance funds should be on firmer footing.
Currently, the funds have only 53 percent of the assets they're expected to need for future payments to more than 141,000 people enrolled in the system, including school teachers and several thousand public university and state educational agency employees.
One critic immediately called the proposal "a shell game." Given the legislature's history of ignoring its annual obligation to the state's pension systems, it's risky for taxpayers to borrow billions of dollars for a bailout, said Chris Tobe, a Louisville financial consultant and former board member at the Kentucky Retirement Systems.
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"People ask me if this pension-obligation bond is a good idea," Tobe said. "Compare it to a consolidation loan for consumers to pay off high credit card debt. Bonds can theoretically work only if the state does the equivalent of tearing up — or paying in full each month — the credit cards."
The state paid $722 million into KTRS in 2014 in the form of employer contributions. (Teachers paid in $440 million through paycheck withholding.) However, KTRS officials say the state stopped making its full recommended contributions in 2008, leading to annual shortfalls of several hundred million dollars.
Also, they say, new accounting rules this year will require the system to nearly double its reported liabilities, from $12 billion to $23 billion, unless a permanent funding mechanism is put in place. That would reduce the system's funding level to 45 percent.
Lawmakers previously approved nearly $900 million in bonds for KTRS in 2010. But they rejected the system's request for more bonds during the 2014 session.
Stumbo, D-Prestonsburg, said he has since changed his mind given the historically low interest rates that make it relatively cheap to borrow. At a November legislative hearing, KTRS officials assured lawmakers they could earn investment returns of better than 7 percent on money borrowed at 5 percent or less, he said.
Stumbo said he would be willing to add language to his bill that would prohibit KTRS from issuing the bonds next year if interest rates suddenly jump.
"I've never been a fan of selling bonds for the pension funds," Stumbo said. "The only reason I support it now is because I think there is a window of opportunity where it will work. It's like taking out a second mortgage on your house and hoping you can at least beat the market on whatever investments you make with the money you borrow. That's easy to do at 2 percent. It's not so easy at 9 percent."
In November, KTRS officials lobbied a legislative committee to consider letting them issue 30-year bonds, either for $3.3 billion or $1.9 billion. They said the state could pay the debt by redirecting hundreds of millions of dollars from two different sources: savings from the money already budgeted to pay off the 2010 bonds, which will begin to decline this year; and assorted other retiree assistance the state funds, such as cost of living adjustments, sick leave and medical insurance subsidies.
"We're just offering an option here. We're not policymakers," Beau Barnes, KTRS deputy executive general counsel, said Friday. "With interest rates expected to remain low through at least the later part of next year, though, this opportunity has just been handed to us on a silver platter."
Reopening the state budget to authorize bonds in a shorter 30-day session would require a three-fifths supermajority vote in the House and Senate, Stumbo said. Senate President Robert Stivers, R-Manchester, said Friday that he will look at Stumbo's plan, but he would like to have input from Gov. Steve Beshear and the state's Finance and Administration Cabinet.
Stumbo said the House does not intend this year to intervene on behalf of the state's other ailing public pension fund, the Kentucky Retirement Systems, which covers state and local government employees.
The $2 billion KRS fund for 118,325 state workers in non-hazardous jobs has only 21 percent of the money it's expected to need for future payouts. That number is expected to worsen in the next few years. But Stumbo said he's confident the legislature's "pension reform" plan of 2013 ultimately will prevail now that lawmakers have committed to making the full required contribution into KRS every year.
Kentucky Government Retirees, an advocacy group, said it welcomes the bond proposal for school teachers, but it also wants lawmakers to aid the state pension fund.
"Unfortunately, the full employer contribution being provided in the current budget has not halted the further decline of the fund over the first five months of the fiscal year. Assets have dropped by about $95 million, and at the current market performance, the fund would lose another $500 million by the end of the fiscal year," said Jim Carroll, a spokesman for Kentucky Government Retirees.