Kentucky Teachers Retirement System offers two bonding proposals to shore up funding
11/19/2014 06:41 PM
FRANKFORT — Two years after passing pension reform for retirement systems covering state and municipal employees, Kentucky’s teachers will be asking lawmakers for sizable bonds to shore up their underfunded pension plan.
The Kentucky Teachers Retirement System offered proposals for 30-year bonds worth $1.9 billion and $3.3 billion Wednesday during the Interim Joint Committee on State Government meeting. The bond plan, if passed, would come as $900 million in bonds to refinance KTRS’s health care fund issued in installments begin to wind down in fiscal year 2017.
Beau Barnes, general counsel and director of operations at KTRS, said the system’s funding and long-term stability are at stake. The pension program is about 52 percent funded, with $13.9 billion in unfunded liabilities.
With interest rates low in the wake of the recession and KTRS’s performance on the stock market after returning 18.1 percent on last year’s investments, time is of the essence, he said.
“If we don’t get additional funding in soon, there’s something that’s going to happen,” Barnes told lawmakers. “It’s not a risk, but it’s an absolute certainty. If we don’t start getting some additional funding for the pension fund, the funding level is going to start declining. It’s going to get much harder to fix.”
Barnes said the $1.9 billion bonding plan would divert money already budgeted to KTRS for debt service and amoritized payments on past cost-of-living increases, dependent medical subsidies and sick leave liabilities to help the state find a long-term funding solution. The $3.3 billion proposal would only use funds from amoritized payments to help shore up the system alongside bond money.
He told reporters he expects the bonds to be issued with interest rates at around 4 percent, much lower than the pension liability’s average growth of 7.5 percent annually.
The plans would give the system a 63 percent funded ratio, Barnes said. Without action on a long-term funding plan, new federal accounting standards will force KTRS to lower its assumed rate of investment return and cause its funding status to drop to 42.4 percent, he said.
By fiscal year 2026, the additional actuarially required contribution to KTRS would hit $988.5 million without a plan in place, he added. Barnes projected that number would decrease to $428.1 million with the $1.9 billion bond and $420.8 million with the $3.3 billion bond.
KTRS will need support from the General Assembly for authorization to sell bonds, a process that would require a supermajority in both the House and Senate, 60 and 23 votes respectively.
House Speaker Greg Stumbo, who previously listed potential bond sales for KTRS among House Democrats’ top priorities in next year’s session, reinforced his support for the plan Wednesday.
“I think we need to listen very carefully to it and work with them to try to craft some form of a proposal, which hopefully we can get enough support to pass in both chambers because these market rates won’t be favorable much longer in my judgement,” Stumbo, D-Prestonsburg, said in the committee meeting, noting the Federal Reserve will likely get pressure from banks to raise interest rates as the economy improves.
“… What they’re saying is we can’t tarry. If we wait too long, we’ll lose this window of opportunity.”
Barnes, speaking after the meeting with reporters, said he has had talks with state senators and representatives, and he’s scheduling a meeting with Senate President Robert Stivers, R-Manchester, to discuss the proposal.
The bonding proposal has backing from the Kentucky Education Association, KEA President Stephanie Winkler said.
“KEA supports the bonding plan proposed by KTRS, which won’t take any more money out of the state budget but will leverage money already appropriated to our pensions to help address the unfunded liability in the short term,” she told lawmakers.
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