As Kansas budget woes worsen, Brownback looks to risky strategy for relief

“Least bad alternative” — words no one wants to hear from an expert about their planned financial strategy.

And yet, that’s what Boston College’s Center for Retirement Research called an arcane financial instrument called pension obligation bonds, a strategy that Kansas Gov. Sam Brownback seems eager to pursue in the midst of the state’s self-inflicted budget crisis.

The Boston College report called PBOs the “least bad alternative” on the plus side of its list of pros and cons.

It’s no wonder, then, that Kansas is thinking of going down this same route to shore up its pension system, considered one of the most underfunded in the nation.

A PBO happens when a state or city sells bonds and then uses the money from the sale to invest in other assets, hoping that those investments will fetch a better return than the interest on the bonds.

If that return doesn’t materialize, the state is left holding a debt-heavy bag.

Brownback has floated the idea of issuing a $1.5 billion sale of PBOs to solve the vexing fiscal conundrum posed by the Kansas Public Employee Retirement System, an issue amplified by the falling state revenues caused by Brownback’s tax cuts.

The Boston College study on PBOs says the maneuver is a common symptom of a city or state suffering from difficult fiscal decisions. Who else has used PBOs? 

• Detroit, which fell into the largest municipal bankruptcy in U.S. history in part due to PBOs.
• Stockton, California, which also went bankrupt.
• New Jersey, a state once run by Jon Corzine, formerly a Goldman Sachs CEO who once called PBOs “the dumbest idea I’ve ever heard of.”

Even The Wall Street Journal, a paper that has bestowed praise upon Brownback in its editorial pages for his bold tax cuts, ran an article last week that quoted a portfolio manager who said PBOs were “not a type of security I’ve been very fond of” due to the risk that the invested funds won’t deliver their anticipated returns.

Kansas Sen. Jeff King, the state’s point man for pension reform, said in the same article that PBOs make sense in a low-interest-rate environment.

The Boston College study counters that such reasoning works when a state has a “well-funded pension plan” and is in “sound fiscal health.”

It’s difficult to ascribe either of those terms to Kansas.