BRADENTON, Fla. - A Kentucky panel will consider cutting benefits, increasing contributions, and using pension bonds to protect the solvency of the state's severely underfunded teachers' pension plan.

Using pension obligation bonds to jump-start tackling a $14 billion liability is useful to consider but should not be the state's primary course of action, consultant William Fornia, founder of Pension Trustee Advisors, advised the panel on Friday.

"I believe the most important thing is figuring out the proper blend of cutting benefits for future hires, contribution increases, and hitting returns to address the big picture first," Fornia said.

For the Kentucky Teachers' Retirement System, bond financing would make it easier to deal with the liability that now exists from a financial standpoint, he conceded.

Though it was not discussed during the meeting, Kentucky legislators rejected a bill during this year's session to have the state issue $3.3 billion in POBs.

However, chronic pension underfunding resulted in a downgrade for the state, said workgroup member Roger Marcum, chairman of the Kentucky Board of Education.

On Sept. 3, Standard & Poor's cut the Bluegrass state's issuer credit rating to A-plus from AA-minus due to "the state's demonstrated lack of commitment when it comes to funding its annual contributions" and the pressure that places on the state's finances.

Kentucky has underfunded its annual required contribution to KTRS since 2000, and that, combined with varying investment returns and rates, is among the reasons the liability has swollen to $14 billion today, Fornia said.

Gov. Steve Beshear appointed the KTRS Funding Work Group earlier this year to recommend ways to shore up the teachers' plan.

On Friday, members of the panel also discussed placing newly hired teachers into the Social Security system.

Existing teachers and retirees must remain in the state plan as their benefits cannot be legally changed because they are covered by an inviolable contract. They do not qualify for Social Security benefits, either.

"Even with reduced benefits for future teachers, the system will run out of money," Fornia said. "If you cut new hires then increase contributions from the state for all payroll you will tread water a lot longer" before the system becomes insolvent.

This is not an approach desired by actuaries or rating agency analysts, he said, but at least the funding path would be on an upward slope.

Fornia recommended that the state target becoming 100% funded over a 30-year timeframe using a hybrid approach.

Among the options should be "the cheapest way to do this for taxpayers," one panelist said.

No decisions were made about the use of pension bonds, although KTRS submitted an analysis of phasing in the full payment of the annual required contribution over eight years with no financing as well as using various bonding amounts between $520 million and $3.3 billion.

Further analysis of the options will be presented at the next meeting on Oct. 16.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.