BRADENTON, Fla. — The Kentucky Asset/Liability Commission on Wednesday expects to price $468 million of taxable notes to refinance obligations the state owes to the Teachers’ Retirement System for medical benefits.
The fixed-rate, uninsured transaction is expected to have maturities between 2011 and 2020 as well as a make-whole redemption provision. The notes will be repaid from the state’s general fund.
During the order period, priority will be given to Kentucky residents. The notes are exempt from state income taxes.
The notes are refinancing loans the state obtained starting in fiscal 2005 from the teacher’s pension fund to pay the state’s share of medical benefits promised to retired teachers.
“This was a very unpopular thing because teachers didn’t like the idea of using their pension to make loans for health care,” said Jonathan Miller, secretary of the Finance and Administration Cabinet. “For taxpayers it was not a good deal either because of the interest rate that was expected.”
The loans carried 7.5% interest rates, which officials hope to lower significantly with this week’s offering, Miller said.
Based on current market conditions, the state anticipates the interest rate on the notes to be under 4%, which would save about $70 million, or $7 million per year on average over the life of the notes.
In addition to lowering loan costs through refinancing, officials recognized the need to make changes in the pension plan.
Gov. Steve Beshear appointed a pension working group to recommend reforms, according to Miller, who chaired the body.
“That resulted in a special session of the Legislature that unanimously passed a series of pension reforms that basically modernized benefits for future employees,” Miller said.
Those reforms included increasing employees’ contributions and prohibiting employees from retiring, returning to work for the state, and earning a second pension or “double dipping.”
“Because these are taxable notes, we are expecting a full range of investors,” Miller said. “We’ve already seen a broad diversity of folks listen to the Internet roadshow who we hope to be involved in the offering.”
Tom Howard, executive director of Kentucky’s Office of Financial Management, said the state may bring one more note sale to market but the size and date have not been determined.
The Legislature authorized the sale of up to $875 million of notes to repay the existing loans plus another $340 million of loans that may be needed in fiscal 2011 and 2012.
Howard said that pension reforms are expected to significantly lower the amounts needed in fiscal 2011 and 2012.
The notes being sold Wednesday are rated AA-minus by Fitch Ratings, Aa2 by Moody’s Investors Service, and A-plus by Standard & Poor’s. Moody’s assigned a negative outlook while the other agencies placed stable outlooks on the notes.
Fitch also affirmed its AA-minus rating on around $6.3 billion of bonds issued by various Kentucky agencies.
Moody’s affirmed the state’s Aa1 issuer rating as well as the Aa2 and Aa3 ratings it assigns to various state bonds.
JPMorgan is the senior managing underwriter for the deal. Others in the syndicate are Citi, Edward D. Jones & Co., First Kentucky Securities Corp., J.J.B. Hilliard, W.L. Lyons LLC, Morgan Keegan & Co., Morgan Stanley, PNC Capital Markets LLC, Ross, Sinclaire & Associates, and Stifel, Nicolaus & Co.
Kutak Rock LLP is bond counsel. Peck, Shaffer & Williams LLP is underwriters’ counsel.