Kansas Weighs Risky Bet to Cover Its Pension Needs - Yahoo Finance

 

Brownback is pressing the state legislature to approve the issuance of between $1 billion and $1.5 billion in so-called “pension obligation bonds.” The revenue from the bond offering would be immediately invested in the state pension fund, boosting both its bottom line and its capacity to produce investment returns. Brownback, who was reelected to a second four-year term in November, inherited a chronically underfunded pension system when he took office in 2011, though the funding levels initially fell further early in his first term.

The state will pay the bondholders from general revenue, not from the pension fund. But proponents insist this is a good deal for taxpayers, because they assume the earnings from the new money injected into the pension fund will be higher than the interest rate the state has to pay on the bonds. That means that the pension fund will stay on track to meet its growth target while the legislature, on net, spends less money to make that happen.

The catch, of course, is that this is essentially a bet. Kansas taxpayers, and possibly its retirees, would lose big if the spread between the interest rate on the bonds and the pension fund’s investment returns isn’t wide enough or goes negative.

Kansas, because of its revenue problems, was downgraded by credit ratings agencies Moody’s Investors Service and Standard & Poor’s last year. Even after those downgrades, the state should be able to sell bonds offering an annual rate below 5 percent. Backers of the bond offering estimate that the state pension fund will earn 8 percent annually.

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