Legislation to allow the Kentucky Teachers Retirement System to issue $3.3 billion in bonds — shoring up the underfunded pension plan for 140,000 active and retired teachers — passed the state House Appropriations and Revenue Committee on Tuesday and will now head to the House floor.
And while several House Democrats and KTRS officials view the bonding move as a necessary step to reverse its growing unfunded liability, others view it as a gamble that could put the state in an even deeper hole.
Due to a change in federal accounting standards, the unfunded liability of KTRS grew from $13.9 million to $21.6 million last year, with its funding level decreasing from 52 percent to 45.6 percent. KTRS officials say without taking the drastic step of issuing bonds under House Bill 4, their funding level will soon decrease to as low as 42 percent, which would drag it below Illinois as the worst-funded state teachers’ pension plan in the country. However, they estimate that with the bonds, that funding ratio would improve to 72 percent.
Proponents of the bonding bill — including lead sponsor House Speaker Greg Stumbo — say Kentucky needs to strike now, while interest rates are at a historic low, to reverse the pension plan’s negative trend. KTRS officials say that while borrowing money at a 4.5 percent interest rate, they will be taking in estimated returns of 7.5 percent from various investments. That rate of return is similar to the investment performance of KTRS over the past decade, and better than the also-struggling Kentucky Retirement Systems.
“I think that one can conclusively say that (KTRS) has managed their investments well and that they’ve done a good job to date,” Stumbo said in committee yesterday. “Hence, I don’t think it’s improper to consider giving them more money to shore up these funds.”
While KTRS officials have conceded that such bonding is not without risk, general counsel Beau Barnes said yesterday that experts aren’t expecting another large downturn in the economy anytime soon.
Not may Republicans in Frankfort have warmed up to that risk in the current session, though, with some comparing the move to using a credit card to pay off old debt. Public pension plans all over the country took big hits when the economy crashed in 2008, and some fear this bonding plan could expose the pension plan to more damage if the economy takes another dive.
KTRS quietly issued roughly $800 million worth of bonds five years ago, to fill a gap for retirees’ health plans, without any reported trouble. But other municipalities around the country have run into calamities when the returns on their pension obligations did not match expectations. Such a scenario helped throw both Detroit and Stockton, Ca., into bankruptcy. And a recent study from Center for Retirement Research at Boston College found that over the past 30 years, most municipalities issuing pension obligation bonds had negative results.
Though Barnes at KTRS says experts they consulted predicted stable market returns well above their interest payments over the next 8 years, Don Mullineaux — the duPont endowed chair in banking and financial services emeritus at the University of Kentucky — tells Insider Louisville such things can’t be known with any degree of certainty.
“Clearly it’s risky, there’s no doubt about that,” says Mullineaux. “And the reason it’s risky is because we don’t know what return we’re going to get when we invest. … The stock market and private equity markets are risky markets, and recessions are essentially unpredictable as well, so we can’t say for sure whether this strategy is going to have a positive outcome.”
As for Barnes’ claim that experts don’t expect a large-scale recession, Mullineaux adds that “a recession is coming for sure at some point, we just don’t know when. If you ask me if it’s going to happen in the next 20 years, I’d say almost surely. In the next two years, probably not, but no one can guarantee that.”
In addition to the HB 4 bonding legislation, several other bills have been filed this session seeking to add transparency to the investments and manager fees paid out by all the state’s pension systems. Manual High School history teacher Randolph Wieck filed a lawsuit against KTRS last year, accusing administrators of being negligent in protecting teachers’ pensions from chronic underfunding by the state, lacking transparency and making bad investments.
While the lack of transparency and alternative investments made by KTRS have been targeted by critics, few would disagree the primary reason for their growing unfunded liability is the failure of the state legislature to pay the full actuarially recommended contribution (ARC) to the pension plan over the past decade. Whereas 10 years ago, the state paid 100 percent of the ARC for KTRS — and the plan had an 80 percent funding ratio — that funding has decreased each year. In 2014, the state paid only 68.4 percent of the ARC, leaving KTRS $260 million short.
The National Council on Teacher Quality recently graded the health of teacher pension plans across the country, giving Kentucky a grade of D-. Only Mississippi fared worse.
Unlike other state employees under the arguably more-troubled KRS pension plans, teachers under KTRS have even less of a safety net if their pension collapses, as teachers are not eligible for Social Security benefits.