Kentucky House approves plan to borrow $3.3 billion to shore up teachers' pension system

FRANKFORT — The Kentucky House approved a plan Monday night for the state to borrow $3.3 billion in bonded debt to prop up the Kentucky Teachers' Retirement System.

Although some Republican lawmakers warned against taking on so much debt, House Speaker Greg Stumbo — the plan's sponsor — described the vote as essentially being for or against schoolteachers. After two hours of debate, the House voted 62-31 to approve House Bill 4 and send it to the Senate, where it faces a more conservative audience.

Senate President Robert Stivers, R-Manchester, said the bonds could cost the state $260 million a year in debt service. Stivers said he would prefer to make the annual recommended contribution into the teachers' pension fund but not incur more debt.

"The sky is not falling," he said.

The $18 billion retirement system for teachers has only 53 percent of the assets it's expected to need for future pension payments. Officials of the Kentucky Teachers' Retirement System, or KTRS, say the state stopped making its full recommended contributions in 2008, leading to annual shortfalls.

Stumbo, D-Prestonsburg, acknowledged during a floor speech that issuing $3.3 billion in 30-year bonds — the state's biggest bond issue ever — "is a large proposal. But ladies and gentlemen, we have a large problem.

"We owe this debt. You can pay it this way, or you'll have to pay it another way."

Stumbo's plan: With historically low interest rates, the state can borrow billions of dollars at about 4 percent and turn that over to KTRS, which can produce investment returns of about 7 percent. This plan depends on the economy not faltering in coming years, Stumbo acknowledged.

"It's minimal risk," he said. KTRS has produced a 10-year investment return of 7.2 percent and a 20-year return of 8.2 percent, he said.

Republican lawmakers said Kentucky's state government already struggles with $9.1 billion in debt. Adding billions of dollars more could lead ratings agencies to mark down the state's credit, and it would crowd out any borrowing in the near future for projects such as a medical research center the University of Kentucky is lobbying for this winter.

The cities of Detroit and Stockton, Calif., were forced to file for bankruptcy after issuing pension bonds that failed to produce the expected returns, noted Rep. Brad Montell, R-Shelbyville.

"Ladies and gentlemen, there are tremendous risks when you're talking about this sort of obligation, particularly at this size," Montell said.

However, the House rejected an amendment that Montell proposed to scale back the bond issue to $520 million and study the issue for a year. Stumbo called it "a Band-Aid for a bigger wound."

Lawmakers approved nearly $900 million in bonds for KTRS in 2010. But they rejected the system's request for more bonds during the 2014 session.

In November, KTRS officials asked a legislative committee for 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 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.

Stumbo's bill would do nothing to address the pension shortfall for state workers at the Kentucky Retirement Systems, or KRS. The primary state pension fund at KRS has only 21 percent of the money it's expected to need for future payouts. Like KTRS, KRS has suffered because the state has failed to make the recommended contributions every year.

In other action Monday, the House passed a bill that would allow Kentucky residents to register to vote on the Internet. Currently, only soldiers deployed overseas and other Kentucky residents living abroad may register to vote online. But the House bill directs the state Board of Elections to create an electronic voter registration system.

This story was originally published February 23, 2015 at 9:34 PM with the headline "Kentucky House approves plan to borrow $3.3 billion to shore up teachers' pension system."