Head of teachers’ pension wants special session for $3.3B bonding plan
03/27/2015 08:53 AM
FRANKFORT — After falling short in its bid for $3.3 billion in bonds to shore up its finances, the Kentucky Teachers’ Retirement System may request a special session to reconsider the proposal.
Citing the “magnitude” of the $14 billion in unfunded pension liabilities that will quickly grow to $21.6 billion by July 1 without a funding plan, KTRS Executive Secretary Gary Harbin said Thursday the KTRS Board of Trustees has directed him to have external analysts look at the financial situation facing the teachers’ retirement agency and evaluate its suggestion to sell $3.3 billion in bonds.
“We’re going to be looking at asking for a special session,” he told Pure Politics.
“This is worthy of deep understanding and deep study by everyone, and we’re prepared to do whatever and meet with whoever that it takes in order to get this funding solved as soon as possible because we think that the sooner this is solved the better it is for members and the better it is for taxpayers,” Harbin added, noting KTRS has not contacted Gov. Steve Beshear’s office about a special session.
KTRS’s auditor, Mountjoy Chilton Medley, will likely take on the task of reviewing the pension system’s $3.3 billion plan and its books, Harbin said.
“The first step is to get the outside review,” he said. “I started yesterday morning at eight o’clock discussing that with staff and with outside counsel on how to get that review done and what best way to manage that, and we’ll be taking steps over the next few days to get that review done as quickly as possible.”
House Bill 4, legislation directing $3.3 billion in bonds for KTRS, fell by the wayside in the session’s final days as negotiators from both chambers couldn’t reach an agreement by sine die.
Senate Republicans balked at House Speaker Greg Stumbo’s bill, which would be the largest bond sale in Kentucky’s history. Instead, the GOP wanted to study KTRS and its funding status before next year’s legislative session, offering $50 million in the meantime.
Senate President Robert Stivers called HB 4 “irreponsible” and chided House Democrats for walking away from “an immediate good-faith cash infusion into the teachers’ retirement fund, combined with a framework to find the long term reforms necessary to stabilize the system.”
“There is no crisis that requires $3.3 billion in new debt; the fund can make payments for the next 21 years,” Stivers, R-Manchester, said in a statement Wednesday.
But one legislative leader’s “good-faith cash infusion” is another’s “appeasement offer, I think, to try to dodge the problem,” as House Speaker Greg Stumbo told reporters Thursday.
Rep. Rick Rand, chairman of the House budget committee, traced the $50 million proposition to a budget transfer from the Public Employee Health Trust Fund, from which lawmakers plucked $63.5 million of a roughly $110 million savings in House Bill 510 to boost reserves and fund $10 million each for SEEK and heroin treatment options.
“If the Senate wants a study that’s fine with me,” he said in his Capitol office. “It’s going to say that it doesn’t have enough money in it, but if you want that printed up in a 50-page study, at the end of the day that’s what it’s going to say: the system doesn’t have enough money in it.”
Stumbo, D-Prestonsburg, said he would support calling a special session to rethink his $3.3 billion proposal, which he suggested splitting in pre- and post-study installments during conference committee negotiations on HB 4.
“It needs to be addressed,” he said. “It needs to be addressed now.”
Part of the problem with waiting, according to Stumbo and Harbin, comes as the Federal Reserve considers raising interest rates.
An expected interest hike of at least 1 percent over the next year and a half may cost as much as $664 million more over the life of the 30-year bonds if issued, Harbin said. He noted, however, that bonding is still feasible with the heftier price tag.
“That in and of itself would not negate the advantages of using bonding for the state to step in, but it does raise the cost by about 10 percent,” he said.
Harbin said he only learned of the Senate’s $50 million counteroffer the morning lawmakers adjourned sine die Wednesday, and he took it as an “acknowledgement on the part of the Senate that there is an issue” that requires additional funding for KTRS.
But while he would welcome any relief, he said the $50 million would only cover about a third of one month’s retiree payroll of some $144 million. What’s more, Harbin said the $18.1 billion KTRS expects to liquidate $3 billion in assets over the next four years to help make benefit payments.
KTRS officials have already begun drafting the agency’s budget request, and Harbin said the pension system will seek actuarially required contributions totaling $510 million in fiscal year 2017 and $490 million in 2018. Under HB 4, the state would have paid just $44 million in the first year of an eight-year phase-in window for a long-term funding plan, he said.
Beshear, though, said he has no reason to call the General Assembly back to Frankfort when asked Wednesday about the prospects of a special session, which generally costs about $60,000 per day and lasts at least five days.
“I think we have addressed everything of any immediate concern,” he told reporters at the Capitol. “Obviously there are things that I think need to be addressed … but I’m happy that we made progress on each of those (bills on public-private partnerships, local-option sales taxes and a statewide smoking ban).”
The General Assembly’s inaction comes at an inopportune time, at least from a bookkeeping standpoint.
Without a dedicated plan to pay off its unfunded liabilities, KTRS’s reported unfunded obligations of $14 billion will grow to $21.6 billion on paper thanks to new government accounting standards, which Harbin said has bumped the pension’s expected investment return from 7.5 percent to 5.23 percent.
KTRS’s funded ratio will drop from 53.6 percent to 45.6 percent once the higher pension debt hits Kentucky’s financial statements in July, according to Harbin and KTRS valuations.
“We’ve been working with the folks in finance to get the numbers to them for this new liability on the books for over two years now actually,” Harbin said.
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