DALLAS — After winning final passage in the Colorado House, a bill to authorize nearly $10 billion of pension obligation bonds for the state retirement system has only two days to win approval in the Senate.
Hopes of passing
Holbert said there is not enough time left in the session to fully consider such a complex measure.
"It is such a substantial bill," Holbert said in announcing his decision. "Let's take the summer to talk this through, ask the tough questions, bring it back next year."
Supporters argue that waiting is risky because historic low interest rates may not be available next year, reducing investment returns for the proceeds.
Introduced in the House April 28, the bill was heard in committee the next day and debated on the House floor April 30. The 2015 session ends May 6.
Holbert's withdrawal leaves Sen. Andy Kerr, D-Lakewood, as the sole Senate sponsor.
The bill would begin the process of authorizing nearly $10 billion of bonds. Actual amounts to be issued would be left up to Gov. John Hickenlooper and State Treasurer Walker Stapleton.
Before that, however, the bill would requires a thorough vetting by a state court. The bonds would not be state obligations, according to the bill's language, but the bill requires verification of that statement from the courts.
Colorado's constitution prohibits state and local governments from issuing multi-year debt without a public vote of the people.
Treasurer Stapleton supports the bill but said in an April 28 letter to the House and Senate leadership that issuing the bonds would entail risks and is not a complete solution to the underfunding of the state retiree pension fund.
Even the Colorado Public Employees' Retirement Association board was not unanimous in support of the pension bonds, voting 7-2 for the proposal with four members abstaining.
After voting no, board vice chairman Benjamin Valore-Caplan stepped down from the board on April 28. Valore-Caplan, founder and chief executive of Syntrinsic Investment Counsel, is a registered investment adviser, whose clients include nonprofit pension funds.
"With PERA on track to become party to the issuance and administration of debt securities, my responsibilities to PERA now come into conflict with my professional responsibilities as a Registered Investment Advisor and fiduciary to several clients — including nonprofit pensions — around the country," Valore-Caplan wrote in a
"As an entrepreneur, you can appreciate the care with which I must approach a situation that could be devastating to my firm and its stakeholders should a claim — legitimate or otherwise — be made at any point against the issuers of the Pension Obligation Bond securities."
Valore-Caplan said he remained opposed to the pension bonds. Hickenlooper, who appointed Valore-Caplan to the PERA board, can veto any legislation authorizing the bonds.
PERA executive director Greg Smith said the bill introduced just seven days before the end of the session emerged from meetings between state officials, PERA executives, politicians and school district officials.
According to proponents, the pension bonds would carry the state's issuer credit ratings of AA by Standard & Poor's and Aa1 by Moody's with stable outlooks.
Under legislation passed in 2010, Colorado reduced retiree benefits and increased pension contributions. But covering a $23 billion funding shortfall would take 30 years to cover under that formula.
PERA officials said the plan is on course, with a funding level of about 64%. Selling pension-obligation bonds could raise the funding threshold to 70% or 80%, PERA officials said.
Opponents see the pension bonds as a threat to the state's credit. Markets fluctuate too much to guarantee returns, they say, and an economic collapse on the scale of 2008 is always a possibility.
"It's possible that $10 billion could take a 20 to 30% haircut within months," Rep. Kevin Priola, R-Henderson, said during debate May 1.
Neighboring Kansas is seeking underwriters for its first issue of pension bonds from $1 billion authorized recently by lawmakers.
Kansas Gov. Sam Brownback signed Senate Bill 228 on April 15, aiming to get to market as soon as possible to take advantage of the low rates on municipal bonds. The first issue is expected to be only a portion of the $1 billion authorized.
Opponents of the Colorado pension bonds gained some ammunition on May 1 as Janney Capital Markets issued a report strongly discouraging the use of the instruments to replenish pension funds.
"The decision for a state or local government to issue pension obligation bonds (POB) is a controversial one, and it should not be taken lightly," the report noted. "POBs are controversial because issuers and much of the market for that matter are still deciding whether they are a feasible pension financing and arbitrage instrument, a harmful Wall Street devised product, or a tactic used by distressed and procrastinating governments to punt off into the future the need to make decisions in the here and now.
"It is very difficult for an issuer to achieve a positive credit outcome after issuing POBs," the report noted. "There is the strong potential that the end effect results in a negative hit to an issuers' credit profile, occasionally resulting in or contributing to a rating downgrade."
