Kansas' (rated Aa2/stable outlook) $1 billion sale of pension obligation bonds (POBs), due to price August 12, will do little to solve the challenges surrounding Kansas' poorly funded state-administered pension plans, according to Moody's Investors Service.
The bonds are rated one notch lower than the state at Aa3/stable outlook.
Even if the state's pension bonds work as designed, contributions must rise in order to address growing unfunded liabilities. Contribution requirements (in dollars) will still rise by 4% annually, if all assumptions hold, due to the increasing payment structure used by the pension plan.
The state reduced its pension contributions for the next few years in conjunction with this bond sale, signaling the state is using POBs, and taking on some additional long-term risk, to achieve near-term budgetary relief.
Although the bond sale fits into a plan to achieve full pension funding by 2033, the reduction in pension contributions for the next few years in conjunction with the bond deal indicates its use as a modest form of budgetary relief, the agency said.
The pension obligation bonds exchange a "soft" liability (unfunded pensions) for a "hard" one (appropriation debt), Moody's said. Debt represents an inflexible fixed cost that cannot be renegotiated or modified without defaulting. By contrast, an unfunded pension liability can sometimes be modified through benefit reforms or funded over a longer timeline without defaulting.
Kansas' pension plans remain poorly funded, even with this bond deal. The state's practice of capping pension contributions below actuarially determined rates remains in place, and these bonds will rectify the problem only if market returns meet optimistic return assumptions and the state adheres to an escalating future schedule of budgetary contributions. Meanwhile, the state's net pension liability is very high relative to peers, and a $1 billion increase to pension assets has only a modest impact on pension funding levels.
