TOPEKA — The Kansas Senate waded into the world of high finance with fiery debate primarily among Republicans on a bill issuing $500 million in bonds with proceeds invested under the premise earnings would help the bottom line of the Kansas Public Employees Retirement System.
The state in 2004 and again in 2015 approved similar maneuvers that involved a total of $1.5 billion in bonds for KPERS. In both instances, the rate paid to buyers of the bonds was higher than the 3.75% ceiling authorized under the proposed deal in House Bill 2405. The bill as approved by the House would have opened the door to $1 billion in bonds, but the Senate would prefer to slice that in half. The Senate voted to advance its version to a final vote.
“Interest rates are at an all-time low,” said Sen. Rick Billinger, the Goodland Republican and chairman of the Senate Ways and Means Committee. “The bond rate is good. That’s one way to look at it.”
Sen. Tom Hawk, D-Manhattan, said the bond option was a wise strategy that took advantage of KPERS’ impressive record of sustained positive return on investment.
On Thursday, the Senate approved the bill on a vote of 32-8. The House could choose to concur with the Senate’s version of the bill regarding KPERS. Or, the House could compel the Senate to negotiate adjustments to the legislation.
Hutchinson Sen. Mark Steffen told colleagues that bonding represented nothing more than legal gambling at the possible expense of Kansas taxpayers. He said bond debt would be an albatross if KPERS’ investment portfolio were hammered in an economic crash during the next 30 years.
“It’s just risky gambling. The dark clouds are building,” said Steffen, a Republican. “We are taking an incredible gamble. This is something I would never do in my personal life. You build wealth by not borrowing money and investing it in the stock market.”
The state pension system has 315,000 public employee members and operates an investment portfolio of about $23 billion and a long-range unfunded liability of $6 billion.
Billinger pushed back by pointing to the potential of low borrowing costs in terms of new bonding for KPERS. He said the House bill wouldn’t allow the bonding to proceed if the borrowing rate was above 3.75%. On the 2015 issuance of $1 billion in bonds, he said, earnings so far amounted to 8.4% on bonds issued at a cost of 4.6%. On the 2004 issuance of $500 million, KPERS has earned 7.6% on money borrowed at 5.3%. The state’s annual payment obligation on these bond issues is about $100 million.
He equated it to going to a bank to secure a better interest rate on a home mortgage, and suggested now would be a great time to refinance a house.
Sen. Richard Hilderbrand, R-Baxter Springs, said in rebuttal: “What we’re doing is putting a second mortgage on our home.”
Hilderbrand also said he was concerned about inevitable downturns in the economy with a negative influence on the stock market and other investment vehicles relied upon by KPERS. In addition, he said, Kansas debt per capita stood at $1,500. In terms of the four surrounding states, the next highest was Missouri at $480.
“We’re going to go into debt to get out of debt,” Hilderbrand said. “To me, that’s not fiscally responsible.”
Sen. Virgil Peck, a Havana Republican, said paying off the bonds would take decades and saddle the grandchildren of legislators with the obligation.
“Is this really a path that we want to forge for future generations?” Peck asked. “Are we really wanting to pile on debt?”
However, Sen. J.R. Claeys, R-Salina, said the evidence in Kansas demonstrated use or bonding to assist with KPERS’ unfunded liability was legitimate. “It turns out to be genius over time,” Claeys said.
Meanwhile, Sen. Caryn Tyson, a Parker Republican and chairwoman of the Senate Assessment and Taxation Committee, offered an amendment that would permit public employees to opt into a new fund at KPERS.
Tyson’s proposal would allow public employees to voluntarily move into a 401K-type account with the employee and employer making matching contributions in a defined-contribution system. Each employee would be free to decide his or her own risk level in terms of a retirement account and the plan’s operation would be self-funded, she said.
“This is so important for your constituents. They’re afraid KPERS is not going to be there for them,” Tyson said.
The so-called Kansas Thrift Savings Plan should have been fully vetted by the Senate’s pension committee rather than considered as an amendment on the Senate floor, said Sen. Jeff Longbine, an Emporia Republican. After a pause to consider whether the amendment was germane, it was ruled out of order.
Under the bill, the Kansas Development Finance Authority would issue the bonds in a lump amount or in a series. In addition, the State Finance Council, which includes Gov. Laura Kelly, would be required to give final approval to the KDFA, which would legally hold the debt obligation rather than KPERS.