Voice For Liberty

Tag: KPERS

  • Gary Sherrer and Kansas Policy Institute

    Gary Sherrer and Kansas Policy Institute

    A former Kansas government official criticizes Kansas Policy Institute.

    I wouldn’t normally use a Facebook comment in a public way, but the comment was left in public, to a post on my Facebook profile. Plus, the writer is a former Kansas government official. He’s Gary Sherrer, who has been Lieutenant Governor, Secretary of Commerce, and Chair of the Kansas Board of Regents.

    From the author's Facebook profile, starting December 2, 2016. Click for larger.
    From the author’s Facebook profile, starting December 2, 2016. Click for larger.
    Sherrer had criticized the truthfulness of Kansas Policy Institute, claiming he “could write an essay” on his criticism of KPI. Upon my suggestion for him to do so, he offered two criticisms.

    First, Sherrer wrote this: “They count KAPERS payments that in the past were direct state payments. Now they send them to the school districts and within hours transfer them back to the state yet it shows as increased revenue in the local budget. Same $s just an accounting trick.”

    This is a standard argument of Kansas public school spending advocates, which is that because of a change in the way teacher retirement funds (KPERS contributions) are handled, it looks like the state is spending more on schools, when in fact it is not.

    In response, Kansas Policy Institute noted this: “According to Dale Dennis, KPERS funding was last sent directly to KPERS in 2004; it has since been sent directly to school districts included in reported school funding totals.”1

    Dale Dennis is Deputy Commissioner at Kansas State Department of Education and head of Fiscal and Administrative Services.

    Wichita Public Schools, State Revenue by Source, KPERS ContributionsEven though Dennis is the state’s top education finance official, we don’t have to rely solely on him to illustrate changes in KPERS payment accounting. Information from the Wichita public school district2 shows the same. Here I’ve plotted the funding sent by the state of Kansas to USD 259 for KPERS contributions. As Dennis indicated, in 2005 the Wichita school district started receiving money from the state for KPERS. Prior to that year it received none.

    So if anyone wants to claim that KPERS payment accounting has been changed in order to be deceptive, why don’t we ask former governor Kathleen Sebelius why it happened under her watch?

    Additionally, the argument that the KPERS funds are held by school districts for just hours or minutes is trivial. If the state allowed school districts to hold the funds for two days, two weeks, two months — would that make any meaningful difference? Instead, school districts ought to be thankful that the taxpayers of the state of Kansas cover part of employee retirement costs. But we don’t hear those thanks, just complaints.

    Sherrer is correct on one thing: There are people in government who may be touting increased KPERS payments as increased school spending. Two things: KPERS spending is school spending. If not that, what is it? Second, these people are not Kansas Policy Institute. KPT takes efforts to separate KPERS spending from other school spending.3

    Here’s something else from Sherrer: “Anther example- local property taxes collected for schools was always sent directly to the school district- after all it is local not state tax $s. Now the local sends it to the state, then it is sent to school districts. Again, same dollars but trick accounting to make it look like increased state spending.”

    I’ve never seen KPI make the claim that Sherrer makes. Others may make it, but KPI takes steps to adjust figures for this change.4

    Finally, Sherrer writes: “When is Kansas Policy going do do research on the financial disaster called the Kansas budget?” Well, KPI has done this, providing a detailed roadmap. In my reporting on KPI’s plan, I wrote:

    The State of Kansas has implemented tax reform that reduces the tax burden for Kansans. A remaining challenge that has not yet been tackled is spending reform, that is, aligning Kansas state government spending with a smaller stream of tax revenue. Critics of tax reform say the Kansas budget is a mess or a train wreck, pointing to projections of large deficits before long. Tax increases or service cuts will be required to balance the budget, contend critics.

    In a policy brief released today, Kansas Policy Institute presented a plan for bringing the budget in balance while retaining low tax rates (and future reductions) and accommodating projected future spending needs for Medicare and schools.

    You can more about the plan at For Kansas budget, balance is attainable.

    —
    Notes

    1. Trabert, Dave. State school board member should practice what he preaches. https://kansaspolicy.org/state-school-board-member-practice-preaches/. ↩
    2. USD 259 Comprehensive Annual Financial Report for 2015, State Revenue by Source, Governmental Funds, and USD 259 Comprehensive Annual Financial Report for 2007, State Revenue by Source, Governmental Funds. ↩
    3. For example, see Dorsey, David. Non-KPERS funding sets another per-pupil record in 2015-16. https://kansaspolicy.org/non-kpers-funding-sets-another-per-pupil-record-in-2015-16/. ↩
    4. For example, see Parkes, Patrick. State school funding ranks high in Kansas. https://kansaspolicy.org/state-school-funding-ranks-high-in-kansas/. ↩
  • VIDEO: KPERS payments and Kansas schools

    VIDEO: KPERS payments and Kansas schools

    There is a claim that a recent change in the handling of KPERS payments falsely inflates school spending. The Kansas State Department of Education says otherwise. View below, or click here to view at YouTube.

    Click here for more about this topic.

  • Kansas government ‘hollowed-out’

    Kansas government ‘hollowed-out’

    Is Kansas government “hollowed-out” even though spending is rising?

    In the Wichita Eagle, Burdett Loomis writes: “In 2011, Gov. Sam Brownback and a far-right Kansas House of Representatives began to hollow out state government, all in the name of smaller, more efficient, more private administration.”1

    Loomis doesn’t define what he means by “hollow out” but the measure of the size of government is spending. Not taxation, but spending, because if government spends without taxing by the same amount, someone has to pay, eventually. Or, in the case of Kansas, we spent funds saved from years when Kansas collected more than it spent. (Yes, Kansans were over-taxed.) Then, we raised taxes.

    Kansas General Fund. Click for larger version.
    Kansas General Fund. Click for larger version.
    In recent history Kansas general fund spending hasn’t fallen, except for one year, and that doesn’t “hollow out” government. Tax revenue declined, but what did Kansas do in response? Instead of cutting spending, the state engaged in deficit spending. For two years in a row, Kansas spent over $300 million each year from its savings in order to support (mostly) increasing spending. When that savings ran out, the state raised taxes rather than cutting spending.2

    Charts at the end of this article show Kansas government spending, from general fund and all funds spending. One chart shows total dollars spent, and one shows per-capita spending. Both are adjusted for inflation. On these charts it’s difficult to see where total spending has been cut or slashed in recent years. All funds spending continues its upward trend, with a few exceptions. General fund spending remains level or trending slightly upwards.

    Loomis: “But the value of a stable, reliable state government that delivers core programs in education, transportation, health and social services remains a bedrock element of most successful American states.”

    An example from the visualization. This shows statewide spending, per pupil, adjusted for inflation. Click for larger version.
    An example from the visualization. This shows statewide spending, per pupil, adjusted for inflation. Click for larger version.
    Education spending in Kansas is not falling.3 Tables at Kansas State Department of Education have the numbers.4 Now we hear that the increases in spending are “all KPERS,” meaning contributions to the state retirement fund for teachers, and the state has recently changed to method of reporting KPERS contributions in a way that artificially inflates school spending. But Kansas State Department of Education says the method of reporting KPERS has not changed for ten years.5 Maybe we should ask former governor Kathleen Sebelius why she changed the method of reporting KPERS contributions in a way that (purportedly) artificially inflates school spending.

    Kansas students compared to national. Click for larger.
    Kansas students compared to national. Click for larger.
    By the way, when writing about “reliable” state services, I wish Loomis would take notice of the huge gaps in achievement in our state’s schools between white students and minority students. For Kansas white students, 42 percent are proficient in reading at grade 4. For Kansas black students, only 15 percent are proficient, and 20 percent of Kansas Hispanic students. Similar gaps appear in reading at grade 8, and in math at grades 4 and 8.6 The sad fact is that this gap is reliable, occurring year after year.

    KDOT spending on major road programs. Click for larger version.
    KDOT spending on major road programs. Click for larger version.
    As for transportation, there have been transfers from the state’s transportation fund to the general fund. This has been going on for a long time. But look at actual spending on roads. KDOT’s Comprehensive Annual Financial Report shows spending in the categories “Preservation” and “Expansion and Enhancement” has grown rapidly over the past five years. Spending in the category “Maintenance” has been level, while spending on “Modernization” has declined. For these four categories — which represent the major share of KDOT spending on roads — spending in fiscal 2015 totaled $932,666 million, up from a low of $698,770 in fiscal 2010. This is actual spending on roads without regard to transfers in or out of the highway fund.7

    Transfers from Sales Tax to KDOT. Click for larger.
    Transfers from Sales Tax to KDOT. Click for larger.
    And while critics of the current administration focus on transfers from the highway fund, look at transfers to the fund. Nearby is a chart showing how many sales tax dollars were transferred to the highway fund. In 2006 the transfer was $98,914 million, and by 2015 it had grown to $511,586 million, an increase of 417 percent. Inflation rose by 18 percent over the same period.8

    I’ll leave it to someone else to research spending on health and social services.

    Near the end of the article, Loomis writes: “Over the past few years, much of the political discourse has focused on shrinking revenues from tax cuts.” But we should really be looking at the level of spending.

    Now: Could it be possible that even with rising state spending that services are, in fact, being “hollowed out?” Yes. Absolutely. It is, after all, government providing these services.

    Kansas Spending Adjusted for CPI 2016-01

    Kansas Spending, Per Capita, Adjusted for CPI 2016-01

    Notes for charts:
    Data is from Kansas Fiscal Facts 2015
    2015 through 2017 are approved figures, not actual spending
    2015 and beyond population are my estimates
    CPI is Consumer Price Index – All Urban Consumers, CUUR0000AA0

    —
    Notes

    1. Loomis, Burdett. Kansas is becoming a hollowed-out state. Wichita Eagle, July 9, 2016. Available at www.kansas.com/opinion/opn-columns-blogs/article88555862.html. ↩
    2. Kansas has been borrowing, however. See: Weeks, Bob. Kansas transportation bonds economics worse than told. Available at wichitaliberty.org/kansas-government/kansas-transportation-bonds-economics-worse-than-told/. ↩
    3. Weeks, Bob. Kansas school spending: Visualization. Available at wichitaliberty.org/wichita-kansas-schools/kansas-school-spending-visualization/. ↩
    4. Kansas State Department of Education. Total Expenditures by District. Available at www.ksde.org/Agency/Fiscal-and-Administrative-Services/School-Finance/Budget-Information/Total-Expenditures-by-District. ↩
    5. Weeks, Bob. KPERS payments and Kansas schools. Available at wichitaliberty.org/wichita-kansas-schools/kpers-payments-kansas-schools/. ↩
    6. Weeks, Bob. ‘Game on’ makes excuses for Kansas public schools. Available at wichitaliberty.org/tag/wichita-and-kansas-schools/. ↩
    7. Weeks, Bob. Kansas highway spending. Available at wichitaliberty.org/kansas-government/kansas-highway-spending/. ↩
    8. Weeks, Bob. Sales tax revenue and the Kansas highway fund. Available at wichitaliberty.org/kansas-government/sales-tax-revenue-kansas-highway-fund/. ↩
  • KPERS payments and Kansas schools

    KPERS payments and Kansas schools

    There is a claim that a recent change in the handling of KPERS payments falsely inflates school spending. The Kansas State Department of Education says otherwise.

    A member of the Kansas State Board of Education has written an article that has received widespread attention. But the member, Jim Porter, is wrong on several accounts.

    In his article, Porter stated that a recent change in the handling of Kansas Public Employees Retirement System (KPERS) contributions falsely inflates school spending.1

    This is a standard argument of Kansas public school spending advocates, which is that because of a change in the way teacher retirement funds (KPERS contributions) are handled, it looks like the state is spending more on schools, when in fact it is not.

    In response, Kansas Policy Institute noted this: “According to Dale Dennis, KPERS funding was last sent directly to KPERS in 2004; it has since been sent directly to school districts included in reported school funding totals.”2

    Here, Dale Dennis contradicts Porter. Dennis is Deputy Commissioner at Kansas State Department of Education and head of Fiscal and Administrative Services.

    Wichita Public Schools, State Revenue by Source, KPERS ContributionsEven though Dennis is the state’s top education finance official, we don’t have to rely solely on him to illustrate Porter’s error. Information from the Wichita public school district3 shows the same. Here I’ve plotted the funding sent by the state of Kansas to USD 259 for KPERS contributions. As Dennis indicated, in 2005 the Wichita school district started receiving money from the state for KPERS. Prior to that year it received none.

    Trabert’s article explains other ways in which Porter is wrong. I have to wonder what is the underlying reason for Porter writing things like this. Is he being told incorrect information or is he simply lying?

    —
    Notes

    1. “Deception #2 – Until recently the state contribution to the Kansas Public Employees Retirement System (KPERS) was sent directly to KPERS. Now the funds are transferred to the public school account and then transferred to KPERS on the same day. Again, this was lauded as an increase to public school funding even though it was the same amount of money with just an additional transfer from the State of Kansas to the school to KEPRS.” Jim Porter for Kansas State Board of Education – District 9 Facebook post. Available at www.facebook.com/JimPorterKSBOE9/posts/1001536676582800. ↩
    2. “Jim Porter’s Deception #2 – According to Dale Dennis, KPERS funding was last sent directly to KPERS in 2004; it has since been sent directly to school districts included in reported school funding totals. Again, Mr. Porter doesn’t define “recently” but most people would take it to mean within the time frame he references (the Brownback administration) and that clearly is not the case.” Trabert, Dave. State school board member should practice what he preaches. Available at kansaspolicy.org/state-school-board-member-practice-preaches/. ↩
    3. USD 259 Comprehensive Annual Financial Report for 2015, State Revenue by Source, Governmental Funds, and USD 259 Comprehensive Annual Financial Report for 2007, State Revenue by Source, Governmental Funds. ↩
  • Under Goossen, Left’s favorite expert, Kansas was admonished by Securities and Exchange Commission

    Under Goossen, Left’s favorite expert, Kansas was admonished by Securities and Exchange Commission

    The State of Kansas was ordered to take remedial action to correct material omissions in the state’s financial statements prepared under the leadership of Duane Goossen.

    During the administration of Governor Mark Parkinson, the State of Kansas issued eight series of bonds raising $273 million. Regarding these, the U.S. Securities and Exchange Commission has determined that the state failed to adequately inform investors of significant, material, negative information.

    In a nutshell, according to the SEC: The Kansas Public Employee Retirement System (KPERS) was in terrible financial condition compared to other states, and Kansas did not adequately disclose that to potential bond buyers. That violated the Securities Act. In 2011 Kansas implemented reforms to the SEC’s satisfaction.

    Duane Goossen biography
    Duane Goossen biography
    Of interest to current Kansas public affairs is that the head of the Kansas Department of Administration at the time the SEC found these violations was Duane Goossen. In its findings, the SEC specifically criticized the Department of Administration for its preparation of financial statements included in bond offerings — statements that were missing materially important, and negative, information.

    Since his departure from Kansas government, Goossen has remained active in shaping Kansas policy, first as vice president for fiscal and health policy at Kansas Health Institute. 1 In 2015 Goossen joined Kansas Center for Economic Growth as Senior Fellow. 2 In announcing Goossen’s appointment, KCEG executive director Annie McKay noted his “wealth of expertise and knowledge.”

    KCEG advocates for more taxes on Kansans, with the Goossen announcement mentioning “unprecedented and unaffordable tax cuts.” Goossen added he was excited to continue “contributing to the conversation across Kansas about the importance of budget and tax policy and the consequences of drastic tax cuts on everyday investments critical to Kansans.”

    It’s ironic that Goossen mentioned “investments,” as we now know that under his leadership Kansas violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, materially misleading bond investors while other states made full disclosure.

    While critics of current Kansas government — including Goossen 3 — use KPERS underfunding as evidence of failure, this incident shows that KPERS has had funding problems for a long time, under leadership of both parties, and of both conservatives and moderates.

    The SEC findings

    According to a press release from the Securities and Exchange Commission, the State of Kansas “failed to disclose that the state’s pension system was significantly underfunded, and the unfunded pension liability created a repayment risk for investors in those bonds.” 4

    The nature of the SEC’s inquiry involved “the disclosures surrounding eight bond offerings through which Kansas raised $273 million in 2009 and 2010.” 5

    In its order, the SEC found: “The failure to disclose this material information in the Official Statements resulted from insufficient procedures and poor communications between KDFA and the Kansas Department of Administration (“KDA”), which provided information to KDFA for inclusion in the Official Statements, including preparing the State’s financial statements that were included as part of the Official Statements.” 6 (emphasis added)

    The SEC also found that Kansas was an outlier among the states in failing to disclose negative information: “Kansas’s practice of not disclosing the underfunded status of KPERS became increasingly inconsistent with the practice of most states issuing municipal securities, which generally provided disclosure in their CAFRs or the body of their Official Statements regarding the financial health of their pension funds. By 2008, with the exception of Kansas, the overwhelming majority of the Official Statements for state-level bond issuances at a minimum disclosed the UAAL or funded ratios of the associated state-level pension plans, particularly if those plans were significantly underfunded.”

    Prior to a new issue of bonds in November 2011, the SEC found that the State of Kansas instituted satisfactory policies and procedures regarding disclosure of material information.

    1. Kansas Health Institute. Budget director leaving for new post. Available at www.khi.org/news/article/budget-director-leaving-new-post. ↩
    2. Kansas Center for Economic Growth. Duane Goossen joins Kansas Center for Economic Growth. Available at realprosperityks.com/media/press-releases/duane-goossen-joins-kansas-center-for-economic-growth/. ↩
    3. Duane Goossen. The FY15 Budget Is Not Fixed Yet. Kansas Center for Economic Growth. Available at realprosperityks.com/duane-goossen-fy15-budget-fixed-yet/. ↩
    4. SEC.gov. SEC Charges Kansas for Understating Municipal Bond Exposure to Unfunded Pension Liability. Sec.gov. Available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370542629913. ↩
    5. ibid. ↩
    6. SEC. Administrative proceeding file no. 3-16009. Order instituting cease-and desist proceedings pursuant to section 8a of the Securities Act of 1933, making findings, and imposing a cease-and-desist Order. Available at www.sec.gov/litigation/admin/2014/33-9629.pdf. ↩
  • Lawrence school funding and employment

    Lawrence school funding and employment

    A Kansas school board president complains about funding, but the district has been able to grow employment faster than enrollment.

    A newspaper article features the Lawrence school board president complaining about school funding. (Advocates rally for school funding amid competing claims about cuts, March 14 Lawrence Journal World)

    There are competing claims. Some look at total spending. Others, as noted in the article, say analysis of spending must be nuanced by consideration of “special education, retirement fund contributions and aid for special budget funds such as bond and interest funds and capital outlay.”

    The same article also notes: “But because lawmakers converted school funding to a block grant system last year, combining several different kinds of aid into a single grant, exact comparisons to previous years are difficult to make.”

    All this is true to some extent. But there is a way to clear some of the fog, and that is to look at the number of employees in a school district compared to the number of students.

    Schools tell us that their largest expenditure is on personnel costs. Across the country, the portion of current expenditures going to salaries and benefits hovers around 80 percent. 1

    So looking at the number of employees tells us a lot — almost everything, in fact — about how the school district is faring.

    When we look, we find that starting in 2011 the number of employees in the Lawrence school district has risen faster than the number of students. (The count is divided into certified employees and K-12 teachers, and does not include special education teachers.) Correspondingly, the ratios of these employees has fallen over the same period. The pupil-teacher ratio has fallen from 17.28 to 15.47, and the certified employee-pupil ratio has fallen from 11.70 to 10.85.

    So however spending is compartmentalized, whether KPERS contributions are included or not, whether the funding comes from state or local sources, whether spending is adjusted for inflation, the Lawrence school district has been able to improve its employee-pupil ratios substantially.

    Data is from Kansas State Department of Education. Visualization created using Tableau Public. You may use the visualization to view figures from all Kansas school districts here.

    Lawrence school district employment and enrollment. Click for larger.
    Lawrence school district employment and enrollment. Click for larger.
    1. National Center for Education Statistics: The Condition of Education, Elementary and Secondary Education, Finance, Public School Expenditures. Available at: http://nces.ed.gov/programs/coe/indicator_cmb.asp. ↩
  • In Kansas, teachers unions should stand for retention

    In Kansas, teachers unions should stand for retention

    A bill requiring teachers unions to stand for retention elections each year would be good for teachers, students, and taxpayers.

    The bill is SB 469, titled “Recertification of professional employees’ organizations under the professional negotiations act.” It would require that the Kansas Department of Labor hold an election each year in each school district regarding whether the current representation should continue. These elections, in effect, would be referendums on the teachers union, by the teachers. (Update: The bill has been revised to call for elections every third year.)

    That’s a good thing. The teachers union monopoly ought to stand for retention once in a while.

    The bill has an estimated cost of $340,000 annually, including the hiring of 4 employees. But this is a situation ideally suited for outsourcing to one of the many companies that can perform this work. It would undoubtedly be less expensive and would not require the hiring of employees to do a job that is seasonal in nature.

    Further, the professional employees’ organization (union) that represents each district ought to bear the cost of the elections, if they want to continue representing a district.

    How effective has the teachers union been in advocating for teachers? In particular, teachers in the Wichita public school district ought to be wondering about the benefit of its union. The contract for this year did not include a pay increase, although the teachers do get some additional time off as the school year was shortened by two days. (Which makes us ask: Where is the concern by the board or teachers for the welfare of the students?)

    Wichita public school salaries and change. Click for larger.
    Wichita public school salaries and change. Click for larger.
    As far as performance over time, since 2008 teacher salaries in Wichita rose by 2.6 percent. Salaries for principals rose by 8.1 percent over the same period. Statewide, the increase in teacher pay was 7.7 percent, and for principals, 10.9 percent.

    On top of that, the Wichita teachers union takes credit for providing benefits that aren’t really benefits, such as when it promoted that only United Teachers of Wichita members would receive a copy of the employment agreement. In reality, it is a public document that anyone has the right to possess.

    There are many reasons why Kansas schoolteachers might be unhappy with their current union representation, including:

    Creating an adversarial environment for public schools in Kansas. Instead of cooperating on education matters, the union foments conflict with taxpayers.

    Forcing professional employees to work under rules more suited for blue-collar labor.

    Working to deny Kansas teachers a choice in representation. 1

    Promoting a false assessment of Kansas schools that is harmful to Kansas schoolchildren. 2

    Forming a task force to promote a false grassroots impression of support for the teachers union, complete with pre-determined talking points on a secret web page. 3

    Encouraging party-switching to vote in primary elections to protect union members’ “professional interests.” 4

    Constant drumbeat for more school spending without regard to competing interests and taxpayers.5 and taxes to support it.6

    Opposing the introduction of a modern retirement system, instead preferring to saddle Kansans with billions of dollars in debt.7

    —
    Notes

    1. Weeks, B. (2013). Kansas teachers union: No competition for us. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/education/kansas-teachers-union-no-competition-for-us/. ↩
    2. Weeks, B. (2016). Kansas schools and other states. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-kansas-schools/kansas-schools-and-other-states/. ↩
    3. Weeks, B. (2014). Our Kansas grassroots teachers union. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-kansas-schools/kansas-grassroots-teachers-union/. ↩
    4. Weeks, B. (2012). KNEA email a window into teachers union. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/wichita-kansas-schools/knea-email-window-teachers-union/. ↩
    5. KNEA – School Funding . (2016). Knea.org. Available at: http://www.knea.org/home/366.htm. Accessed 8 Mar. 2016. ↩
    6. KNEA – Taxes and Revenue. (2016). Knea.org. Available at: http://www.knea.org/home/368.htm. Accessed 8 Mar. 2016. ↩
    7. Weeks, B. (2011). KPERS problems must be confronted. Voice For Liberty in Wichita. Available at: http://wichitaliberty.org/kansas-government/kpers-problems-must-be-confronted/. ↩
  • Kansas transportation bonds economics worse than told

    Kansas transportation bonds economics worse than told

    The economic details of a semi-secret sale of bonds by the State of Kansas are worse than what’s been reported.

    The late realization last year that the Kansas Department of Transportation had issued $400 million in long-term bonds — largely under the radar — has been met with appropriate levels of indignation by some editorial writers. An example is Dr. Edward Flentje who wrote:

    Right-wing Republican lawmakers have operated under the radar to suspend all statutory limits on highway debt, and that unprecedented authority was recently used to issue record-breaking levels of long-term debt to pay for their reckless income tax cuts this year and next.

    Six lines buried deep in a 700-page appropriation bill last spring gave the Kansas Department of Transportation unlimited authority to issue debt, and in early December, without public disclosure, the agency used that authority to issue $400 million in highway bonds. (H. Edward Flentje: Debt limits suspended to pay for tax cuts, Wichita Eagle, December 18, 2015)

    A few notes: The Secretary of Transportation has, in the past, been given broad — but maybe not “unlimited” — authority to issue bonds and borrow money. The series 2012C bonds were issued with this statement: “The 2010 Act Amendments authorized the Secretary to issue highway revenue bonds so long as the Secretary certifies that, as of the date of issuance of any such bonds, the maximum annual debt service on all Outstanding Bonds and on such bonds proposed to be issued will not exceed 18% of Revenues projected for the then-current or any future Fiscal Year.”

    In 2010 Kansas had a Democrat for a governor, which should caution us to not make this issue too political. As far as borrowing from the “Bank of KDOT,” it’s been done before, as explained in 2015 by KDOT. 1 And, payments on these loans have been deferred or not made.

    Instead of politicizing the issue, let’s concentrate on the facts and merits. And when looking at the Series 2015B bonds, there is plenty to criticize.

    KDOT outstanding bonds, showing interest-only issues. Click for larger version. Does not include Series 2015B bonds.
    KDOT outstanding bonds, showing interest-only issues. Click for larger version. Does not include Series 2015B bonds.
    First, the state will not pay any principal on these bonds until 2026. Until then the state will pay only the interest on the $400 million, which is $20 million per year. Then, starting in 2026, the state will make 11 annual payments of various amounts towards the principal. In all, KDOT’s schedule shows the state will pay $282,494,750 in interest on a loan of $400 million.

    I don’t think that most Kansans would appreciate the state borrowing so much money for such a long time without making any effort at retiring the principal. But before we politicize: The KDOT Series 2010A bonds ($325 million, dated September 1, 2010) don’t require principal payments until 2032. (These bonds are “Buy America Bonds,” a program of the 2009 American Recovery and Reinvestment Act, and the federal government will pay 35 percent of the interest.) The plan, as outlined in KDOT’s official statement, is that starting in 2032 the state will make five annual payments of between $61 million and $69 million, totaling $325 million, and then the bonds will be retired. 2

    There’s even more to criticize about the 2015B bonds. The actual proceeds the state will receive from the bonds (after costs of issuance and the underwriters’ discount) is $488,242,912. How, you may be asking, can the state issue $400 million in bonds but receive $488 million when it sells them? The answer is an “original issue premium” of about $89 million.

    To explain: Bonds similar to these ought to yield in the range of 2.00 percent to maybe 2.75 percent. But, KDOT is paying 5.00 percent interest. Therefore, bond buyers are willing to pay more than the face value (the $400 million) for these bonds, because they will be earning higher-than-market interest. 3 In fact, these bonds were sold at premiums ranging from 119 percent to 126 percent. Meaning that for every $1.00 worth of bonds bought (representing money the state must repay), the state actually received from $1.19 to $1.26. 4

    That sounds like a good deal for the state, but in exchange for the premiums, the state pays much higher interest. There are several different ways of looking at this, but the upshot is that the state is receiving additional money now in exchange for paying a higher interest rate for many years. About $89 million in extra interest, which increases the actual cost of these bonds beyond what we thought.

    (Again, before we politicize, the state under a Democratic governor has done the same.)

    The allure of borrowing large sums and spending now is not limited to transportation bonds. The state is currently using the recent $1 billion in proceeds from KPERS bonds as a rationale to skip KPERS contributions this year, and also suspend a rule that most proceeds from the same of surplus property goes to KPERS. See This is why we must eliminate defined-benefit public pensions.

    —
    Notes:

    1. FY 2002 Loan to State General Fund. The 2002 Legislature borrowed $94.6 million from the State Highway Fund for the State General Fund and directed that the funds were to be repaid to the State Highway Fund by June 30, 2003. The 2003 Legislature deferred the repayment of the $94.6 million loan into four equal annual installments beginning prior to June 30, 2007. In addition, the 2003 Legislature directed that the State Highway Fund transfer to the State General Fund $30.6 million for activities of the State Highway Patrol and the 2003 Legislature directed that this transfer also be repaid in four equal annual installments beginning prior to June 30, 2007. The first repayment installment was made in June 2007 and the second in June 2008. The 2009 Legislature delayed the June 2009 repayment to June 2011 and the 2010 Legislature eliminated the language authorizing the June 2011 repayment. At this time, there is no authorization for the final two repayments. The Department’s projections included in this Official Statement do not include receiving the final two repayments. ↩
    2. EMMA (Electronic Municipal Market Access), $325,000,000 State of Kansas Department of Transportation Taxable Highway Revenue Bonds, Series 2010A at emma.msrb.org/EA407275-EA318568-EA714328.pdf. ↩
    3. A bond will trade at a premium when it offers a coupon rate that is higher than prevailing interest rates. Investopedia at www.investopedia.com/terms/p/premiumbond.asp. ↩
    4. EMMA (Electronic Municipal Market Access), $400,000,000 State of Kansas Department of Transportation Highway Revenue Bonds Series 2015B at emma.msrb.org/IssueView/IssueDetails.aspx?id=EP369775. ↩
  • This is why we must eliminate defined-benefit public pensions

    This is why we must eliminate defined-benefit public pensions

    Actions considered by the Kansas Legislature demonstrate — again — that governments are not capable of managing defined-benefit pension plans.

    The Kansas Legislature is considering a bill that will allow Governor Sam Brownback to defer making payments to KPERS, the state’s defined-benefit pension system for public employees. The deferred payments would be made up in future years, although there is really no mechanism to enforce this.

    Also, the bill considers eliminating the requirement that when the state sells surplus property, that 80 percent must be used to reduce the unfunded actuarial pension liability of KPERS. There is also a moratorium on employer contribution to KPERS Death and Disability fund, which is much smaller than the retirement fund.

    KPERS funded ratio through 2014That unfunded liability is a big problem. It refers to the difference between what KPERS expects to pay compared to the revenue it expects to receive. In recent years the Kansas pension fund has been among the worst in the country, based on the funded ratio. The nearby charts shows the trend of this funded ratio through 2014, the latest date for KPERS valuation reports.

    Last year the state issued $1 billion in bonds to address a portion of the unfunded liability. While this helps KPERS, it simply means that the state owes another billion dollars on a different balance sheet. But it’s the same taxpayers that will eventually pay.

    Barry Poulson, Ph.D., Emeritus Professor at the University of Colorado — Boulder has written on the danger of borrowing to shore up state pension funds. As explained below, there is the “lack of nexus between the investment of the bond proceeds and payments for unfunded liabilities in the plan.” This means that the borrowed funds may be used for current spending rather than for correcting the KPERS unfunded liability.

    He further explains: “If legislators see that additional funds are available to pay off unfunded liabilities in the pension plan they may choose to allocate less general fund money to meet these pension obligations.”

    This is what is happening in Kansas. The borrowing of a billion dollars has let legislators and the governor feel — incorrectly — that there is breathing room, and that the state can slack off making the contributions it should be making this year. This is highly irresponsible and reckless.

    Following, from Dr. Paulson:

    A major flaw in the proposed issuance of pension obligation bonds is the lack of nexus between the investment of the bond proceeds and payments for unfunded liabilities in the plan. The experience in other states is that sometimes bond proceeds are earmarked for other state expenditures. The most egregious example of this problem is the state of Illinois which issued $10 billion in pension obligation bonds and then used the proceeds to meet current expenditures rather than to pay off unfunded liabilities in the pension plan.

    Even if the state of Kansas would not commit this form of fraud on the taxpayers the fungible nature of state funding makes it impossible to guarantee the nexus between bond proceeds and the payment for unfunded liabilities in the pension plan. If legislators see that additional funds are available to pay off unfunded liabilities in the pension plan they may choose to allocate less general fund money to meet these pension obligations. The state has not allocated the annual required contribution (ARC) to KPERS for several decades and is not projected to do so for the foreseeable future. Legislators continue to promise pension benefits without allocating the funds required to meet these obligations. We should expect this moral hazard to be even greater with the issuance of pension obligation bonds.

    Even if the proceeds of pension obligation bonds could be set aside in a lock box and earmarked to pay off unfunded liabilities in the pension plan the state must still address the accumulation of unfunded liabilities in the defined benefit plan. Without fundamental structural change, including shifting public employees to some form of defined contribution pension plan, these unfunded liabilities will continue to accumulate. Legislators should not be diverted from this difficult task by non-reforms, such as the issuance of pension obligation bonds.