Friday, February 02, 2007

Teachers' Retirement Ruling Provides State Opportunity to Avoid Digging a New Financial Hole

When you find yourself in a hole, the first thing you need to do is stop digging. Former Senate Finance Committee Chairman Oshel Craigo, D-Putnam, was fond of saying this (or something very similar).

Two years ago, the Ruling Party had the bright idea of transferring all public school teachers who were first hired after July 1, 1991, from the Teachers' Defined Contribution Plan to the old Teachers' Retirement System (TRS), the defined benefit plan the Legislature had (in a very rare display of wisdom) closed to new enrollees in 1991 after finding the TRS had a multi-billion (that Billion with a B, folks) dollar actuarial, present-value unfunded liability.

However, fast-forward 14 years. The bleeding had been stopped, the Legislature had adopted a 40-plan to amortize the unfunded liability, and almost half of all public school teachers in West Virginia were on defined contribution retirement plans. However, there was just one problem: the teachers predominately did not receive good financial advice. Many of them were lured into buying some very poor investments by some unscrupulous investment houses who decided to employ former teachers to market these poor investments to current teachers.

In 2005, the Legislature tried (ultimately unsuccessfully) to pass a $5 billion bond to cover the unfunded liabilities in the state's pension funds, predominately the TRS. To help build political support for this measure, the Legislature offered a carrot: all teachers who were hired after the July 1, 1991, closing of the TRS to new members would, together with their defined benefit plans, be transferred to the TRS. This was contingent on a mail ballot election by defined contribution plan members; by a simple majority, plan members who voted voted to approve the merger. However, the TRS-defined contribution pln merger had a critical flaw: the transfer from the defined contribution plan to the TRS was mandatory; teachers had no way of opting out of their private accounts being transferred into the TRS. As I wrote many, many moons go, even before I began law school, this was blatantly unconstitutional.

Last month, Kanawha County Circuit Court Judge Paul Zakaib ruled in favor of more than 1,400 teachers who sued to block the confiscation of their individual retirement accounts and blocked the merger. Now, the Legislature has a fresh opportunity to reconsider this very ill-advised move.

Part of the reason the Legislature wanted to force all teachers, including those who preferred to stay in the defined contribution plan, to participate in the merger was because the merger was going to create a new unfunded liability that will likely measure in the billions of dollars if it happens in some form.

Now, the Legislature is considering a new plan to allow teachers in the defined contribution plan to transfer to the TRS on a voluntary basis. This would likely satisfy the constitutional problem with the mandatory merger. However, the financial result of this plan would be even worse for the state and the taxpayers than the original merger plan. The unfunded liability increase this plan would cause will far exceed the increase the original merger plan would have created because only those teachers who would presumptively benefit would transfer into the TRS.

Before the Legislature takes its shovel and starts digging a new hole, it needs to think through several major issues.

First, the Legislature should do no harm by not passing any bill that would add to the state's unfunded liabilities. The Legislature that has repeatedly told us taxpayers that it won't reduce our excessive tax burden because they want to do the "fiscally responsible thing" and focus on amortizing the state's unfunded liabilities first now faces a major test of its commitment to that goal; otherwise, they will expose themselves as merely wanting every tax dollar they may extract from us without us getting a bit too cranky at the next election and throwing them out of office. This means we need to stick with the defined contribution plan.

Second, the Legislature needs to provide defined contribution plan members with prudent financial advisers and regulate the types of investments that plan members may be offered and the marketing practices of investment houses that market investments to plan members.

Third, the Legislature should consider the potential alternatives available for assisting teachers who made bad investments, largely through no fault of their own. Clearly, many teachers who were first employed in West Virginia over the last 15 years will have difficulty affording retirement because of poor investment decisions, many of which were (as I am starting to become a broken record) through no fault of teachers whose expertise in in educating children, not managing investments. I do not pretend to know exactly how this should be done. However, this is the direction we need to go.

If the Legislature would properly regulate the investment of the defined contribution plan funds, West Virginia's teachers would have a decent range of sound investment choices available and sufficient freedom to choose among different alternatives. The regulation of investment options will be key to making a defined contribution plan work for most people.

So please, before we in West Virginia go down the road of digging a brand new hole for our state's finances, let's pull the emergency brake and carefully consider alternatives along the lines I have suggested above rather than add several billion dollars to our unfunded liabilities. And while we're at it, let's increase the chance the state will have the necessary revenue to support whatever "catch-up" program for teachers who had poor investments by reducing the tax burden on the private sector and grow our state's economy. There is no other way that will work.