KTRS will work with panel to come up with "reasonable solution" to funding woes, but bonding still "very viable option"

06/22/2015 06:47 PM

FRANKFORT — After a push to authorize $3.3 billion in state bonds fizzled earlier this year, the head of the Kentucky Teachers’ Retirement System said Monday the agency will explore other funding options with a task force specifically impaneled to suggest ways to put KTRS on solid financial footing.

Monday marked the first time officials with KTRS presented details on their pension and health insurance plans to the Public Pension Oversight Board, which had the agency added to its purview in this year’s session.

Gary Harbin, KTRS executive secretary, told lawmakers that the pensions’ funded status will drop from 53.6 percent to 45.6 percent once new government accounting standards take effect July 1.

The move, made because the state lacks a funding plan for teachers’ pensions, will lower assumed investment returns and cause KTRS’s unfunded liabilities to balloon from $14 billion to $21.6 billion, according to figures presented by Harbin. With a 23-member panel set to examine the pension fund and recommend potential financing strategies by Dec. 1, Harbin said he will approach the discussions willing to try just about anything to shore up KTRS.

“Our plans now are to work closely with the task force that the governor’s put together and try to come with a reasonable solution to the funding, whatever that may be, whatever the task force may have,” he said.

“We think bonding is still a very viable option, and this is one that is good for both the state and for the pension plan for teachers.”

House Bill 4, legislation that would have approved $3.3 billion in bond funds for KTRS, would would have immediately improved the plan’s funded ratio from 53.6 percent to about 66 percent and allowed the legislature to phase in full actuarially required contributions over an eight-year period, he said.

But interest rate increases would affect the cost of such an undertaking. The Federal Reserve may ratchet up interest by as much as 1.5 percent within the next 18 months, Harbin said, noting the bonding plan would still work with the added costs given “historically low” interest rates in recent years.

“We’re looking at a debt that’s growing at 7.5 percent, so it would still be feasible,” he said. “It’s just that the expense to the taxpayers goes up or the expense to the commonwealth goes up by about $116 million every 25 basis points (.25 percent) that the rate’s raised.”

After the Republican-controlled Senate balked at the bonding proposal, lawmakers couldn’t agree on a funding plan for KTRS before the General Assembly adjourned this year’s session sine die.

Rep. Brent Yonts, co-chairman of the Public Pension Oversight Board, said his colleagues should reconsider the $3.3 billion bonding plan before it’s too late.

“Next semester is it, probably,” said Yonts, D-Greenville, of the likelihood of enacting the bonding proposal before the Federal Reserve raises interest rates.

“The window is a short window I think, and we need to act on it,” he continued. “These are issues which reasonable people disagree on, I understand that, but something’s got to give on this issue or you’re going to have all these baby boomers coming up, you’re going to have the age population growing older and older.”

Baby boomers collectively nearing retirement is just one of myriad factors affecting the retirement system. Harbin said KTRS has liquidated $2.1 billion in investment assets to meet retiree payroll since 2006, with another $3.4 billion in similar sales expected within the next four years.

“If markets don’t hold up, we’re going to be selling investments at the wrong time, so we won’t be able to be as savvy of investors as we have been in the past due to our cash-flow situation,” he said.

Bonds represent the easiest and most likely method of infusing a large sum of cash in KTRS, Yonts said.

When asked about tax reform as a means to pay off some of the state’s retirement debt, Yonts said that could also work — if the legislature had the political will.

“It may be easier to issue a bond than to do tax reform, politically,” he told reporters. “… Last I checked there’s a whole library dedicated to tax reform proposals, multiple versions. I even think I was on one 10 or 12 years ago.”


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