Pension Funding Turns To General Revenue

The Associated Press, June 27, 2005

As debate continues nationally over the future of underfunded retirement programs for public employees, West Virginians have decided not to bank on the stock market to cure their state’s pension problems.

A Saturday special election saw voters reject, by 54 percent to 46 percent, a plan to provide ailing pension funds for teachers, judges and troopers with up to $5.5 billion from the sale of bonds. The election, which sought to amend the state’s constitutional ban on taking on debt, is not expected to deter other state and local governments as they examine whether to shore up pension plans by issuing bonds.

“Quite a few states have pension bonds,” said Jason Dickerson, senior director at Fitch Ratings. “In many cases, state and local governments don’t need local approval. I don’t know that it [the election] would affect state or local governments.” But the defeat leaves West Virginia with the more traditional method of curing pension debts: diverting the needed funds from the state’s budget. A court-ordered payment plan siphons an ever-increasing amount from the budget annually until 2034.

“We were hoping that we would be able to get better control over how much the state was going to have to pay each year,” said Judy Hale, president of the American Federation of Teachers-West Virginia, which supported the bond plan. “This just means there will be less money for other things as those payments increase.”

The funding shortfall for the teachers’ program, which has 45,363 enrollees, is one of the worst among public plans nationwide. Responsible for about $5 billion of West Virginia ’s unfunded pension liabilities, it owes $3.50 in promised benefits for every dollar it has on hand.

A number of state and local governments also face hard choices. The 127 state and local plans tracked by the National Association of State Retirement Administrators suffer from a combined shortfall of $279 billion. For West Virginia and 12 other states, unfunded pension liabilities exceed their general revenue budgets.

While West Virginia ’s annual payment plan increasingly saps its budget — this year’s $350 million payment equals 11 percent of general revenue, while 2034’s payment will be $724 million — voters found the prospect of selling bonds the more risky venture.

Manchin had promised savings of $1.5 billion to $3 billion for the bond plan by investing the bond proceeds. The savings — generated by locking in annual payments of $350 million over 30 years — would be used to create jobs and expand the state’s economy, he said.

The governor now says he wants to move on to other issues and will leave the pension problem to future governors and legislatures.

But closing pension funding gaps is only part of the problem facing West Virginia and other states. Past failures to contribute the employers’ share of retirement funds, cost-of-living increases and the recent stock market slump helped create those unfunded liabilities. The affected states are looking for ways to avoid repeating past mistakes once they climb out of debt.

Manchin had lawmakers pass an array of pension-tightening measures earlier this year. Among their provisions, the legislation mandates that any benefit increase be fully funded within six years.

Saturday’s failed vote marks the first major policy defeat for Manchin since he took office in January. A former lawmaker and secretary of state, the 57-year-old Democrat had enjoyed a string of successes tackling West Virginia’s auto insurance rates, workers’ compensation debts and other issues. A SurveyUSA poll of approval ratings conducted in May ranked him the sixth-most-popular governor in the nation, and the second-most-popular Democratic governor.

But Manchin and a coalition formed to promote the bond sale didn’t begin seriously stumping until about two weeks before the election.

The Vote Yes for West Virginia ’s Future campaign included state and local chambers of commerce, other business groups and several labor organizations. The AFT-WV and the West Virginia Education Association were particularly supportive, as Manchin has pledged to address teacher pay and working conditions during a special legislative session now discussed for September.

The election’s outcome raises the political profile of the plan’s loudest critic, Massey Energy Co. CEO and Chairman Don Blankenship. Blankenship spent several hundred thousand dollars on a series of radio and television ads and automated phone calls that decried the stock market risks and fees earmarked for “lawyers and bankers.”

Blankenship waded into West Virginia politics last year by spending an estimated $3.5 million, mostly through 527 groups, to unseat a state Supreme Court justice in the November election.

Blankenship had previously sparred with Manchin after the governor persuaded lawmakers to raise the severance tax on coal. With subsidiaries that employ more than 3,000 West Virginians , Massey is among the state’s largest private employers.