The State of Kansas issued over $1 Billion of taxable revenue bonds last week through the Kansas Development Finance Authority (rated Aa3 by Moody’s, and AA- with a negative outlook by S&P). The bonds are not tax-exempt because the proceeds will be invested in the state’s public pension funds. While past results of using bond proceeds to increase pension funding have been mixed, we continue to believe there are benefits to issuing pension obligation bonds. Using bond proceeds for pensions can reduce the persistent underfunding of required pension payments and can increase the transparency of a municipality’s pension accounting and pension management. This is the case in Kansas, as its pension plans are in the 60% funded range, and the state’s annual contributions have been consistently less than actuarial requirements.
The repayment of the Kansas bonds is an obligation of the state’s general fund and is not tied to the performance of the pension plans. The bonds are appropriation-backed revenue bonds, one of the state’s primary methods of issuing debt, as it does not issue traditional general obligation bonds. While S&P has a negative outlook on its AA- rating, the state has taken steps to move toward structurally balancing its budget by cutting expenditures and raising revenues. Even if the ratings were downgraded into the A category, the bonds were priced attractively at 85 to 115 basis points over U.S. Treasuries depending on tenor, comparable to the spread for BBB-rated corporate bonds.
Sources: Moody’s, S&P