More debt isn’t answer to pension mess

Jim Anderson Stivers Published:

More municipalities are betting on pension bonds to cover obligations. It is a bad idea! Financial history in other states confirms it. However, those warnings will not matter to the commonwealth and our General Assembly. One would think our state auditor or the Legislative Research Commission would sound the warning alarm. The auditor, who is obviously grooming for a run for governor, would be very reluctant to get involved. Such action toward legislative affairs would impair the auditor’s chances of being elected governor. That alarm will not come from the auditor’s office.

The recent suggestion by some members of the legislature to borrow more money for the underfunded retirement funds is an idea that has not seen any due diligence by studying previous failures of pension obligation bonds in other states. Politicians favoring this financial instrument do not have any idea what they are suggesting and know little of the dangers of POBs.

California is impacted the most by the issue. Stockton encountered problems after issuing pension bonds. The city issued $125 million in pension bonds in 2007, a third of which promptly disappeared when the market crashed in 2008. However, Stockton is still on the hook for the annual interest payments, some $6 million, or about 75 percent of the city’s deficit this year. In late February Stockton announced it was moving toward bankruptcy after determining it was unable to make the payments on these and other bonds.

If the pension funds make smart investments with the borrowed money, the returns can help pay the interest due to borrowers and sometimes even spin off some extra cash to pay pension costs. If they do not, the bonds can create additional costs for taxpayers.

There are governments throughout the United States that just do not want to make the hard choices, even though it means the choices in the future will be worse. They are just going to dig themselves deeper and deeper into a hole. Our governor’s own words echo: “No new taxes!”

Gov. Steve Beshear has appointed what some call a blue ribbon committee composed of politicians to study Kentucky’s tax code and make suggestions. Dang, that is like letting the fox in the hen house. Who made the problems occur in the retirement system? The politicians. Now they are going to help solve this problem. That is like “Alice in Wonderland.” Pure fantasy!

There is little chance of any changes from this tax study group. The chairman is the big spender from Louisville, Jerry Abramson. Should any corrections (increase) in our tax code be suggested, Beshear is sure to leave the action on this crisis to the next governor.

If the legislature approves use of pension obligation bonds, it is because no one was responsible for finding out what happens when you add debt you cannot pay and keep on borrowing. Guess what. You cannot borrow yourself out of debt.

Taking part of the funds in the judicial and legislative retirement funds and transferring them to the KRS seems a fair exchange.

Surely, we cannot do to the members of the assembly what they have done to public employees – leave them with little money in their retirement account. Half of their funds transferred to the KRS would be fair.

Politicians are stubborn and can give you a thousand reasons to oppose this issue but none of those reasons is plausible and honest. Municipal finance experts are sounding alarms about the practice and Oakland, Calif., provides the clearest example of the risks and the allure of these bonds.

Since 2008, the dollar amount of bonds issued has gone up each year, rising from $1.4 billion in 2009 to $3.6 billion in 2010 to $5.2 billion last year, an analysis by The Los Angeles Times shows. With cities and states expected to encounter growing difficulty in funding their pensions, many insiders expect more municipalities to try bonding.

What would happen if Kentucky were unable to meet the bond payments of approximately $100 million? Would payments continue to existing retirees? Hundreds of thousands of state retirees both present and future would get the old ‘I am sorry.” Thanks a lot! How do we buy groceries, medicine and send our kids to school now that our retirement has drastically changed and has greater obligations with little money? If bonds do not pay the adequate return over the cost of investments, then you can spell DOOM for current retirees. Our legislators have no fear of voter backlash.

To see the problem, ask yourself this question: Would you borrow on the equity of your home and invest the money in capital markets, hoping for an 8 percent annual return? If this investment proposition gives you pause — and it should — you understand the fundamental risks associated with pension obligation bonds.

Jim Anderson Stivers, Frankfort, is a retired project manager for the Kentucky Economic Development Cabinet.

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