Pay Down Debt at KPERs With Surplus

 

By Michael Hooper

Kansas has a surplus of $2.9 billion in tax revenue. The Kansas Legislature could go on a spending spree and buy all kinds of things and start new programs, offer tax breaks, maybe give money back to taxpayers.

Or the Legislature could do something that would be very wise; pay down the debt of the Kansas Public Employees Retirement System (KPERs).

The disturbing trend at KPERs in recent years has been its habit of borrowing money to invest in equities. More than $1 billion in borrowings has been used by KPERs money managers to invest in assets that they hope earn a higher rate of return than the interest expense on the debt. So far this strategy has seemed to benefit the KPERs system, but they've had the benefit of a long and prosperous bull market that began in 2009. What if there is a serious correction in stocks and a subsequent bear market for years? This happened in the 1970s when there was high inflation. Well guess what? We're having high inflation right now. And domestic stocks are overvalued.

What if KPERs’ investments start losing money in a bear market. The investments, purchased with borrowed money, may end up being worth less than the debt used to acquire them. This is called being under water, sort of like owing more money on a car than what it's worth. This bear-market-case scenario could be disastrous for KPERs. 

And this is the public government employees retirement system for goodness sakes.

I've been an investor for many years, I don't borrow money to buy stocks. It's too risky. Margin calls are real. 

Kansas Attorney General Derek Schmidt recommended using surplus funds to pay down at least $1 billion in debt at KPERs, WIBW reported.

Schmidt said aggressively prepaying $1 billion will save taxpayers hundreds of millions of dollars in debt service, more than $400 million over the next five years.

On September 30, 2021, KPERs had $25.4 billion under management. The portfolio was up 10.6% year-to-date through September 30 and has been up an average of 10.6% for the last 3 years and 10.5% the last five and 10 years. I would say those are pretty good returns for a portfolio of this size.

A picture of the portfolio shows that 26.2% of assets were in domestic equities 24.8% in international equities, 9.6% in fixed income, 5.7% in yield driven assets, 10.5% in real return assets, 9.5% in real estate and 10.2% in alternatives.

On Jan. 6, Gov. Laura Kelly announced plans to pay off over $500 million in debt at KPERs, using surplus funds.

The Kelly Plan to restore fiscal responsibility includes paying over $500 million in debt off early and avoiding future principal and interest costs. It will also include re-amortizing the legacy unfunded liability of the KPERS fund. Re-amortization has been previously proposed by Republican state lawmakers to help ensure long-term viability of the state employee pension system.

“We must act decisively to meaningfully reduce state debt, rebuild the state savings account, and protect Kansas’ ability to pay its bills in the long term,” the Governor said in a press release.