Plans to raise $3.3 billion in a pension obligation bond sale for the beleaguered Kentucky Teachers’ Retirement System failed to pass through the state’s legislature this week.
In response, the KTRS Board of Trustees may request a special legislative session to reconsider the proposal.
Gary Harbin, executive secretary of the system’s board of trustees, said $14 billion in KTRS’s unfunded liabilities will grow to $21.6 billion by July without a new funding plan.
“We’re going to be looking at asking for a special session,” he told CN2 News in Frankfort, Kentucky.
The state legislature’s next regular session won’t begin until next January.
Harbin told the news station that he hopes the state will reconsider the POB before next session, citing fears that waiting that long could mean issuing a bond after the Federal Reserve raises interest rates, which would dramatically increase the cost of issuing the new debt.
“The sooner this is solved (the) better for members (of KTRS) and better for taxpayers,” said Harbin. “Every time the Fed raises interest rates by 25 basis points, the cost of utilizing this plan goes up by $166 million over 30 years.”
If interest rates were to go up by 1 percent between now and a new bond issuance next year, Kentucky taxpayers would be on the hook for an additional $600 million in costs over 30 years, said Harbin.
Legislation directing $3.3 billion in new bonds passed the House in February, but the law was killed in the Senate, by a convincing 28-8 margin.
Negotiations to reconcile differences between leaders in the two chambers failed at the 11th hour.
The $3.3 billion bond sale would be the largest in Kentucky’s history. Senate Republicans insisted on further study of the issue, and offered an immediate infusion of $50 million, which was rejected by House Democrats, according to myCN2.com.
Doing so was “irresponsible,” according to Senate president Robert Stivers, a Republican.
“There is no crisis that requires $3.3 billion in new debt; the fund can make payments for the next 21 years,” said Stivers in a statement.
Proponents of POBs argue they are a relatively safe bet for state taxpayers, given today’s historically low interest rates.
Cash raised from the bond auction would be infused in KTRS’s investment portfolio and return a higher rate than the cost to service the debt, so long as the pension returns its historical average over the term of the bond, argue proponents.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
