OPINION: Bob Kiss

Why bond sale would be beneficial to state

The Register-Herald, May 15, 2005

In a column last week, I discussed the evolution of the state's pension system debt, the possibility of a bond sale to pay off that debt and the rationale behind a possible merger of the old and new teachers retirement systems.

To understand why a bond sale would be beneficial, a look at the extent of the unfunded liability and the payment plan are necessary.

In the late 1980s, the Legislature and Gov. Caperton were facing a several billion dollar unfunded pension liability - the difference between assets and total promised benefits for all participants - most of which was within the Teachers Retirement System. The debt, caused by decades of financial neglect, was to rapidly grow further out of control.

To get a handle on the situation, the Legislature closed that system to new enrollees, and put in place a 40-year plan to pay off the unfunded liability. It was the most responsible course for the Legislature to take, a course the state has remained on for more than a decade.

Unfortunately, the payment plan becomes increasingly burdensome with each passing year. What started as a $20 million annual payment is now at $325 million, about 10 percent of the state's general revenue budget. By the end of the 40 years, in 2034, the required payment will be $724.7 million. More and more of West Virginia's financial resources are being poured into the payment plan, and when the baby boomers retire, the cost of administering the retirement system will balloon.

The Legislature has no intention of abandoning its plan to pay off the liability, but the reality is the current amortization schedule is strangling the general revenue budget. Right now, the state owes $3.50 in benefits for every $1 in assets within the plan. The liability, currently at $5 billion, is expected to peak in 2015 at $5.36 billion and be lowered to an acceptable $690,000 by 2034.

The debt has been a drag on the state's bond rating. The Teachers Retirement System is considered one of the worst-funded systems in the country. By refinancing the debt, the state could improve its situation.

In taking advantage of interest rates and selling bonds to pay off the liability, West Virginia would be locking in an annual payment to shareholders at a flat $350 million, the amount the current payment plan will reach in 2009 on its way to $500 million in 2022, then finally $724.7 million in 2034.

The actual sale will cost between $30 million and $40 million, but that cost is capped at 1 percent of the bonds, and in the long term, the state will be saving about $1 billion over the course of the next 30 years.

That is the key to successful investing, keeping in mind the long-term financial ramifications. It has been proven throughout this country's history that even in down market cycles, investment in the long term is beneficial.

Keeping in mind that years down the road there will be new leadership in the statehouse, we inserted some safeguards into the pension bond legislation. If voters approve the constitutional amendment to allow the bond sale, there is a provision already in state law that requires that any new debt caused by pension benefit increases for state retirees must be paid down within six years and any new debt caused by benefit increases for active employees must be paid down within 10 years.

Before the state can acquire any additional debt, it must have a plan to fund it in a timely manner.

In addition, the state cannot increase or create benefits that exceed 1 percent of the pension system's total liability. The state also cannot increase or add pension benefits for active employees of a plan that is less than 85 percent funded.

While these stipulations are now in state code, Gov. Manchin's administration will also include them in the bond covenant, the binding contract between the state and bondholders. Therefore, if a future legislature repeals the statute, West Virginia would still risk defaulting on the bonds if it violated those measures, a move that would destroy the state's bond and credit rating, thereby blocking future bond sales for initiatives such as highway construction. No Legislature would risk that.

For my part, I feel as if this is the peak moment in a movement that began when I first arrived at the Legislature in 1989. Interest rates, the progress in responsibly funding the pension plans and the possibility of a merger of old and new teachers retirement system have converged.

The final addition, a vote in favor of the constitutional amendment June 25 to allow for the bond sale, would heal a system that was once mortally wounded and still threatens the financial health of the entire state.