(Bloomberg) — Kansas Governor Sam Brownback is borrowing $1 billion to let it ride in financial markets as U.S. stocks hold close to record highs.
The state is planning to sell bonds Wednesday to inject cash into its underfunded workers’ retirement system. Officials expect to gain by plowing the money into stocks, bonds and hedge funds, anticipating that they can make more on the investments than it will cost to borrow.
The tactic has been popular with states and cities, which have sold $105 billion of bonds to make up for years of failing to save enough for benefits promised to public employees, according to the Center for Retirement Research at Boston College. It can aid those that borrow ahead of a stock-market rally, or push them deeper in the hole if they’re caught by a crash.
The ability to come out ahead “is a crapshoot a lot of times,” said Michael Johnson, managing partner at Gurtin Fixed Income Management, which oversees $9.5 billion of munis in Solana Beach, California. “Longer-term, that tends to be true, but you can’t tell for sure all the time. It’s fairly easy for this to go the other way.”
Brownback, a Republican, proposed the bond sale as a way to reduce annual pension contributions after the state’s revenue declined because of tax cuts. Kansas struggled to balance budgets when the economy didn’t grow fast enough to make up for the lost revenue.
Moody’s Investors Service and Standard & Poor’s both cut Kansas’s credit rating last year because of the budget shortfalls. By 2013, its retirement system was the fifth-worst- funded among states, with about 56 percent of the assets needed to cover the pension checks due as workers retire, according to data compiled by Bloomberg.
The bonds will ease pressure on the budget but do little to fix the retirement system, Moody’s said in a report Monday.
While the borrowing is part of a plan to fully fund the pensions by 2033, “adding $1 billion of debt to do it represents a riskier strategy than the simpler alternative of making larger annual pension contributions,” the credit-rating company said.
Melika Willoughby, a spokeswoman for Brownback, didn’t return a voicemail or e-mail seeking comment.
Kansas’s sale comes as the investment earnings of state and local pensions slipped to 3.4 percent during the year ended in June, the worst performance since 2012, according to Wilshire Associates Inc. The funds expect to make about twice that to keep up with their obligations.
State lawmakers stipulated that the taxable bonds can only be sold if the interest rate is 5 percent or less. The 30-year debt, the longest-maturity securities, may be sold with yields near that level, according to two investors who received preliminary pricing information from underwriters. They spoke on the condition that they not be named because the deal isn’t final.