Bill Summary – FastDemocracy

Division of the Budget
Landon State Office Building                                                                             Phone: (785) 296-2436
900 SW Jackson Street, Room 504                                                                         adam.c.proffitt@ks.gov
Topeka, KS 66612                                  Division of the Budget                               http://budget.kansas.gov
Adam Proffitt, Director                                                                               Laura Kelly, Governor


                                                        May 5, 2021


          The Honorable Steven Johnson, Chairperson
          House Committee on Insurance and Pensions
          Statehouse, Room 276A-W
          Topeka, Kansas 66612
          Dear Representative Johnson:
                    SUBJECT:       Fiscal Note for HB 2289 by Representative Miller
                  In accordance with KSA 75-3715a, the following fiscal note concerning HB 2289 is
          respectfully submitted to your committee.
                  HB 2289 would authorize the Kansas Development Finance Authority (KDFA) to issue
          pension obligation bonds, in one or more series, in an amount not to exceed $1.0 billion, plus all
          amounts required to pay the costs of issuance. Proceeds from those bonds must be applied to the
          unfunded actuarial pension liability (UAL) of the Kansas Public Employees Retirement System
          (KPERS) School Group. The interest rate of those bonds could not exceed 5.0 percent. No bonds
          could be issued without the approval of the State Finance Council, which could give approval
          while the Legislature is in session. The bonds issued and interest owed would be an obligation of
          KDFA and not KPERS. The bonds issued would not be considered a debt or obligation of the
          State for purposes of the Kansas Constitution. The Department of Administration and the KDFA
          would be permitted to enter into contracts to implement the payment arrangements after the bonds
          are issued.
                  In addition, the bill would provide that investment earnings above the debt service payment
          on the bonds would be used to fund a 13th check benefit for eligible retirees and beneficiaries
          retired as of July 1, 2011, and the retirement benefit could not exceed $2,000 before considering
          any reductions for lump sum and survivor benefit options. The additional payment would be made
          by KPERS from the KPERS Trust Fund beginning October 1, 2023, and on October 1 of each
          subsequent year. The following steps would outline the calculation of the annual dividend:
          1.        Calculate the net investment earnings on the bond proceeds for the immediately preceding
                    fiscal year;
          2.        Subtract the debt service cost for the same fiscal year from step 1;
          3.        Divide the amount in step 2 by the total number of eligible retirants and beneficiaries;
          4.        If the retirant dividend calculation in step 3 is less than $25 per person, no dividend would
                    be payable for that year.
The Honorable Steven Johnson, Chairperson
Page 2—HB 2289

        According to KDFA, current interest rates for a $1.0 billion 30-year bond issue are
approximately 3.0 percent. When factoring all costs associated with the bonds and giving KPERS
net proceeds of $1.0 billion, annual debt service payments totaling $49.8 million would be required
with a 3.0 percent interest rate. KDFA notes that a 4.0 percent interest rate would require annual
debt service payments of $55.9 million. The bill would cap the interest rate of the bonds at 5.0
percent. The Division of the Budget notes that depending on the timing of the bond issuance, an
appropriation from the State General Fund would be required in FY 2022 for the full amount, or
for a partial amount if the bonds are issued after July 1, 2021.
         For its calculations, KPERS estimates that bond proceeds would be received in December
2021 and would immediately increase the system’s assets. KPERS notes that the bill provides for
a stream of future dividends to be paid to eligible members beginning in October 2023. The
liabilities attributable to the future payments would be reflected in the actuarial valuations. The
increase in actuarial liability of the future dividends partially offsets the reduction in the UAL from
the bond proceeds. The following estimates have accounted for this reduction.
       With the $1.0 billion in bond proceeds deposited in December 2021, KPERS estimates the
State/School Group funded ratio would improve by 2.8 percent in the 2021 KPERS Actuarial
Valuation (increased from 71.9 percent to 74.7 percent). The funded ratio would stay
approximately 2.5 percent above the current baseline until the UAL is fully funded in calendar
year 2024. The State/School Group employer contribution rate is expected to decrease by
approximately 1.21 percent in FY 2024, reducing from 13.69 percent to 12.48 percent. KPERS
estimates the total State/School Group employer contributions would reduce by approximately
$63.0 million. Using the Division of the Budget’s projected current State General Fund ratio of
FY 2024 employer contribution of 84.5 percent, this would be a savings of approximately $53.2
million from the State General Fund.
        The amount of the dividend check to KPERS retirees and beneficiaries would depend on
the market performance above the debt service of the bonds and cannot be estimated. Any fiscal
effect associated with HB 2289 is not reflected in The FY 2022 Governor’s Budget Report.


                                                       Sincerely,

                                                       Adam Proffitt
                                                       Director of the Budget

cc: Jarod Waltner, KPERS
    Jeff Scannell, Department of Administration
    Bonnie Hawkins, KDFA