Let’s play Good Idea/Bad Idea with our KPERS problem. You owe your neighbor $8000. He does a lot of work on your property and you’re just a little behind – there’s no rush to pay and he’s not charging you extra for being late. So, you go borrow $1000 from the bank at 5% to catch up. You still owe your neighbor $7000 and now you owe the bank $1000 plus interest.
Good Idea or Bad Idea?
I think most Kansans would agree with me if I said “Bad Idea.” But that is exactly what Governor Brownback did with KPERS in 2015. Except he borrowed $1 BILLION from Wall Street – not the local bank. It cost us over $5 million in upfront fees just to get the loan. And that’s even before we talk about interest payments. And my opponent voted for it.
It gets worse. The theory was that we’d borrow at 5% and invest at 8%. Has anyone in Topeka been reading the papers for the last decade? Early estimates for the year have us breaking even at best. The first 5 months yielded 0.2%. Anybody who’s been to the local bank for a CD or money market account knows an 8% yield assumption is a joke.
Anyone searching for yield in this market is heading for risky waters. Today, I checked the BofA Merrill Lynch US High Yield fund effective yield. This is a fund that consists of commercial debt “below investment grade … and an investment grade rated country of risk…” It yields 6.56%. Not quite 2% more than our rate.
Joke’s on us. Kansas is a junk bond.
So, Wall Street played us for suckers. No shame in that, I guess. It’s their job to part fools from their money, and they’re good at their jobs. We all will just have to work that much harder to pay back the money we shouldn’t have borrowed in the first place. All this, just so Kansas would get back to its “actuarial required contribution rate” by 2020 instead of 2021. We took on a BILLION dollars in debt so we’d settle up with KPERS a year early.
That’s if we stop delaying payments to the system.
That’s if the fund’s investments start making money.
That’s two more “ifs” than I want to hear.