House sends $3.3B teachers' pension bond plan to Senate, where KTRS official will focus his efforts
02/24/2015 12:27 AM
FRANKFORT — The state House passed a $3.3 billion bonding plan for the Kentucky Teachers’ Retirement System Monday despite fiscal concerns with what would be the largest debt-financed project in Kentucky’s history.
Nine Republicans voted with the majority Democrats to approve House Bill 4 62-31, two votes more than the 60-vote threshold for appropriation bills.
House Speaker Greg Stumbo, HB 4’s sponsor, said he previously shared misgivings about borrowing to secure funding for KTRS, which has $13.9 billion in unfunded liabilities.
Stumbo’s proposal, pitched by KTRS officials last year, is expected to lift the pension’s funded status from 52 percent to 63 percent and give the state an eight-year window to craft a long-term plan for future contributions to KTRS.
Stumbo, D-Prestonsburg, urged his colleagues to “do something bold” and act while interest rates are low, noting the pension expects to sell the $3.3 billion in bonds at 2.5 to 3 percent if HB 4 is enacted.
“It is a large proposal, but ladies and gentlemen we have a large problem because we’re going to have to pay that debt,” he said in a floor speech. “We contracted, we promised, they relied upon that and gave us years of their lives in service to the children of our state. We owe them that debt. It’s going to be paid.”
Republicans cried foul at characterizing the debate as for or against teachers, instead focusing on how the $3.3 billion debt would affect the state’s pocketbook.
Rep. Brad Montell offered a floor amendment, which was defeated 43-52, that would allow KTRS to sell $520 million in bonds while the Public Pension Oversight Board considers a long-term strategy covering funding and other issues that have troubled the agency.
Montell, R-Shelbyville, said the $3.3 billion bond sale would “likely wipe out” the state’s debt capacity — already $9.1 billion with general fund, road fund and agency debt combined — “for many years to come.”
“This proposal would increase outstanding debt by one-third,” he said. “The State Property and Buildings Commission, which is the primary authority that issues general fund-supported debt, has about $3.9 billion outstanding, and we’re considering almost doubling that with one bond issue.”
Montell also raised concerns of inherent risks associated with the stock market, particularly when $3.3 billion in bonds are at stake. Every decade has featured some major financial crisis, he said.
House Minority Floor Leader Jeff Hoover worried many were so anxious to vote on HB 4 that they were “effectively shrugging off and ignoring the real and well-understood risks associated with” bonding.
“Do you know what transaction drove the city of Detroit to file bankruptcy? It was the issuance of $1.5 billion of pension obligation bonds,” said Hoover, R-Jamestown. “Do you know what transaction drove the city of Stockton, Calif., to file bankruptcy? The issuance of $125 million of pension obligation bonds, and here we’re talking about $3.3 billion.”
At least one KTRS official will refocus his attention on the Senate, where Republicans hold a 26-seat supermajority.
Beau Barnes, KTRS’s general counsel and director of operations, said he plans to “redouble” his efforts to discuss the bonding proposal with senators now that HB 4 has been sent to their chamber. He has “had very good meetings” with some in the Senate, although he has been focused on the House recently as HB 4 moved through the legislative process.
Informally, Barnes said he has heard senators want structural changes for new hires, such as extending years of service and eliminating the practice of pension spiking.
“Certainly our board has proactively been looking at those very issues as well,” he said.
The bond sale would not only stabilize KTRS’s pension fund, but also the state’s annual contributions to the plan, he said.
“If you look at the actual analysis attached to the bill, on out with the bonding bill and the (eight-year) phase-in, we can stabilize the contribution rate for the pension fund at about an addition 8.5 percent of payroll, but if we do nothing that goes out to about an additional 33 percent of payroll and it continues to grow,” Barnes said.
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