Kentucky state capitol
A conference committee in Kentucky will negotiate how to fund the teachers’ retirement system, which has $14 billion in liabilities.

BRADENTON, Fla. - A legislative conference committee in Kentucky will attempt to iron out a major disagreement over whether to issue $3.3 billion in pension obligation bonds.

The committee was appointed Wednesday, a day after the Senate passed an amended House Bill 4 that stripped out both the POB authorization and a plan to phase in full funding of the state's annual contribution to the Kentucky Teachers' Retirement system.

KTRS has $14 billion in unfunded liabilities, a fact often cited as a negative by analysts in the state's rating reports, along with concerns that the state has not paid the annual contribution for a number of years.

Standard & Poor's warned earlier this year that state's AA-minus issuer credit rating could be downgraded absent action in this year's legislative session to address pension reform and funding.

While some experts are critical of using POBs, House Speaker Greg Stumbo, D-Prestonsburg, said taxable interest rates have dropped to 50-year lows, giving the state a window of opportunity to shore up the pension fund.

The Senate, however, voted 26-10 to appoint a bipartisan task force to examine long-term funding avenues instead. The panel would be required to submit recommendations by Dec. 18.

The amended bill is a "measured approach" that would ensure the pension plan remains solvent in the long term, according to Senate President Robert Stivers II, R-Manchester.

Stivers also said that the bonds would be a short-term fix that would not address the systemic problem of an underfunded plan.

Whether the two chambers will agree on a pension funding plan this year is questionable because the last day of session is scheduled for March 24, said KTRS general counsel Robert "Beau" Barnes.

"The Commonwealth has few viable options for funding the teachers' pension fund," he said, noting that the state has empaneled committees to study pension reform and funding measures in 2007, 2008, and 2012.

Kentucky law requires the state to contribute a fixed rate of 13.1% each year based on teachers' payroll. The formula kept pace with funding needs some years, but not in others, said Barnes.

When the flat rate was insufficient in the 2006-2008 biennial budget, the state contributed an additional $42 million. Since then, he said the state has not provided additional funding over the fixed percentage rate to meet actuarial requirements because of the recession and other circumstances.

In fiscal 2016, the catch-up amount above the fixed rate is $386 million and in 2017 an additional $487 million will be needed.

In addition to addressing the long-term pension liability with HB 4, Barnes said another measure is pending that would allocate the debt service after the payoff of certain bonds to the annual contribution. If passed, the measure would provide $9.5 million in fiscal 2017, growing to $116.5 million by 2024.

"This is, of course, welcome, but far less than what is needed to fund the pension fund on an actuarially sound basis," he said.

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