Pension obligation bonds being pitched as a remedy to funding woes in two states are meeting a mixed fate from lawmakers.
Last week in Kansas, the state Senate passed a bill, by a vote of 21-17, that would authorize the sale of $1 billion in POBs, the proceeds of which would be infused in the Kansas Public Employees' Retirement System pension fund, which is roughly 60 percent funded, with a projected $9.8 billion shortfall.
The $1 billion in new bonds is less than the $1.5 billion that Republican Gov. Sam Brownback's administration had lobbied for.
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The bill will now move to the Kansas House, where, last week, the Pensions and Benefits House committee passed its own version of the bill, authorizing $1.5 billion in POB sales, and capping the maximum interest rate on the notes at 5 percent.
Also read: Pension bonds draw debt-laden governments
Proponents of the pension funding measure argue today's historically low interest rates mean POBs are a relatively safe bet for state taxpayers. The cash raised from their auction would return a higher rate than the cost to service the debt, so long as the pension investments return their historical averages over the term of the bond, which can be as long as 30 years.
A study by KPERS actuaries concluded the House bill would save the state $2.8 billion in contribution obligations to the plan. Gov. Brownback has already reduced the states statutory contribution rate for fiscal year 2015.
Servicing the bonds is expected to cost Kansas $90.3 million annually, according to a blog post by Republican state Rep. Troy Waymaster.
In Kentucky, meanwhile, lawmakers proved more leery of POBs, which critics say are a risky tactic when deployed by cash-strapped governments.
After that state's House voted to authorize $3.3 billion in POBs for the state's stressed teachers' pension, the Senate strongly rejected the proposal, killing it by a 28-8 margin.
The Kentucky Teachers Retirement System is funded at just over 50 percent, with nearly $14 billion in unfunded liabilities.
Republican Robert Stivers, the Kentucky Senate president, said the POBs would create debt obligations that would tie up future governors and legislatures in issuing debt for other necessary projects.
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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.
