Market conditions could delay or prevent Kansas from issuing $1 billion in bonds as part of an effort to boost the financial health of its pension system for teachers and government workers, even though top state officials gave the go-ahead Thursday.

Republican Gov. Sam Brownback and five GOP legislative leaders signed off during a Statehouse meeting, a formal step required to authorize the new debt. The two Democratic legislative leaders present voted against the move.

The Kansas Public Employees Retirement System is likely to earn significantly more from investing the funds raised by the bonds than the state will pay to retire the debt over its 30-year life, supporters say. The law limits the state to paying 5 percent interest on the bonds to investors, and in its most recent financial report, KPERS said annual earnings have averaged 8.9 percent over the past 25 years.

State officials are trying to close a projected $9.8 billion shortfall between KPERS revenues and commitments for retirees’ benefits between now and 2033. Issuing the bonds will better fund the pension system in the short-term, and legislators trimmed the state’s projected spending on pension contributions for the next two years.

But two officials with the Kansas Development Finance Authority, the state agency that would issue the bonds, acknowledged Kansas may be blocked because the interest rate is capped.

“There is a possibility the rates go above where the cap is set in the legislation as we go to market with these in six weeks,” Shawn Sullivan, Brownback’s budget director, said after the meeting. The interest it would pay now is 4.95 percent.

Supporters of issuing bonds also note that Kansas issued $500 million in pension bonds in 2004 and has so far come out ahead, even though it is paying almost 5.4 percent interest.

Legislators authorized this year’s bonds and trimmed back on planned increases in pension contributions as they worked to avert a budget deficit for the fiscal year that began Wednesday, eventually raising sales and cigarette taxes. The state’s budget problems arose after Republican legislators slashed personal income taxes at Brownback’s request in 2012 and 2013 in an effort to stimulate the economy.

Senate Minority Leader Anthony Hensley, a Topeka Democrat, said he opposed the bonds because of the state’s financial problems, which he expects will continue into the future.

“I think we’re the last people in the world who should be borrowing money to invest in the stock market,” Hensley said after the meeting.

Teacher, state worker and retiree groups also were skeptical of issuing the bonds. A report last year from the Center for Retirement Research at Boston College said bonds decrease financial flexibility, turning pension payments that can be modified into set bond payments. The report also said underfunded plans and financially stressed governments typically issue bonds, often to lower annual costs.

Source: The Topeka Capital-Journal