CHARLESTON, W.Va. — West Virginia legislative leaders are looking for flexibility in the state’s pension funding to make a dent in the current half-billion dollar budget gap.
An idea being floated by House Finance Chairman Eric Nelson would refinance the state’s pension debt, which is currently scheduled to be paid off in 2034. The refinancing would extend the payments for a dozen years, Nelson said today on MetroNews “Talkline.”
“If we were to extend our obligation by just 12 years we have the potential of saving $100 million a year. Granted, it would cost us a little more over the long run but currently it would save us $100 million,” Nelson, R-Kanawha, said on “Talkline.”
The state currently spends about $500 million to stabilize its pension plans. West Virginia’s discipline in recent years has drawn praise from investment analysts.
There seems to be some enthusiasm for a pension payment budget move in the House — and perhaps thoughts of an alternative in the Senate. Gov. Jim Justice’s administration seems less excited about dialing back the state’s pension obligation payments.
Nelson asked about the possibility this afternoon as pension experts with Pew Charitable Trusts made a presentation before the Joint Standing Committee on Finance.
“Given what you’ve said today, can you comment on a little wiggle room we may have as a body in the payments over these next couple of years?” Nelson asked.
David Draine, a senior officer with Pew, responded that the organization has looked at other states that have changed policy to extend its pension obligation payments over time.
“It does push those costs over to the future,” Draine said. “The minimum you need to get across is making progress on paying your pension debt.”
Draine said some states have made the mistake of backing off too far on paying down their pension obligations. He said picking a plan and consistently sticking with it is the key to staying out of trouble.
“If you take one step back and two steps forward, that is part of managing something,” Draine said.
In an interview with reporters before the legislative session began, House Speaker Tim Armstead pointed to refinancing pensions as one way leaders could start to close the upcoming fiscal gap.
“We need to look at our pensions and the payments going into our pensions,” Armstead said then. “There are ways we can perhaps refinance those to save the state money — and perhaps significant money.”
In the Senate, Finance Chairman Mike Hall wasn’t ready to embrace refinancing the state’s pension obligations, but he is interested in looking at alternatives.
“I don’t know that refinancing would be the first place to look,” Hall said.
Instead, Hall would like to look at “smoothing,” which is the use of accounting techniques to level out fluctuations from one period to the next. He said this might be accomplished not through legislation but through actions of the West Virginia Consolidated Retirement Board.
Hall described a lag where, during a down market, West Virginia has to spend more out of the general fund to make up for the weak performance of its investments.
“Smoothing would be to say, ‘All right, we’ll average this rate of return over four years. And let that number drive what we’ve got to put in. And I’m understanding if we make it a four-year average, we could reduce our obligation this year $43 million,” Hall said in an interview after the Pew presentation.
Doing so could reduce pressure during difficult years like this one, Hall said.
“I wasn’t that enthusiastic about the idea, but I think given the struggles we’ve got this year it’s one thing that could be factored in and help solve the budget crisis,” Hall said.
During meetings last week with members of the House and Senate finance committees, state budget director Mike McKown warned that dipping into the Rainy Day fund or tinkering with the state’s pension obligation payments could backfire.
“We have conservative budgeting, a healthy Rainy Day Fund and payments on our retirement systems,” McKown said.
“We do not have a lot of strengths here and take one of those away, and we’re dinged more on bond ratings. They won’t tell you that, but they will send you a letter saying, ‘We just did it.’”
Gov. Jim Justice has presented a budget proposal that relies heavily on new or raised taxes to fill the upcoming gap. He said his plan would put give the state ability to grow in the future while other proposals would strangle West Virginia’s potential.
“Why in the world have we only kicked the can down the road? All we’ve done is kick the can down the road,” Justice said in a conversation with reporters the day after the State of the State. “What is your objective? Is the sole objective to balance the budget. Then, I’ve said, you’re not thinking right. You’ve got to have a way to grow.”
The representatives of Pew Charitable Trusts praised West Virginia for the progress it has made over the past 20 years in improving the solvency of its pensions.
Katie Selenski, state policy director with Pew, said her team often uses West Virginia as an example of a state making a dramatic turnaround when Pew makes presentations before other states.
“We love to talk about West Virginia as the poster child,” Selenski said.
The Pew team noted West Virginia’s dramatic rebound. In 2000, West Virginia’s pension obligations were just 45 percent funded and ranked 50th in the nation. By 2015, West Virginia’s pension obligation was 77 percent funded and ranked 20th, above the U.S. average of 72 percent.
West Virginia’s improvement came largely because in 1994 the state committed to a 40-year funding policy and stuck with it. Pew credited the state with paying at least 90 percent of its required contributions since 1990.
In 2014 and 2015, West Virginia ranked first and third among states on contribution adequacy, based on net amortization as a percentage of payroll.
The Pew speakers said states that excel with fiscal sustainability commit to fully funding and paying for pension promises, manage investment risk and cost uncertainty and follow sound investment governance and reporting practices.
“This is why we love to talk about West Virginia in other sates and cities. You’re doing just about as well as you could be doing,” Selenski said. “We are very pleased to see this kind of contribution policy in effect and would urge you to continue with it.”