Report Title:
Pension Obligation Bonds; Authority to Issue; Established
Description:
Allows the State and counties to replace State and county contributions to the Employees' Retirement System with pension obligation bonds to reduce unfunded actuarial accrued liability.
THE SENATE |
S.B. NO. |
744 |
TWENTY-SECOND LEGISLATURE, 2003 |
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STATE OF HAWAII |
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A BILL FOR AN ACT
RELATING TO PUBLIC EMPLOYEE PENSION FINANCING.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:
SECTION 1. The legislature finds that the employees' retirement system (ERS) is funded by periodic contributions at actuarially determined rates such that employer contributions, along with employee contributions (for those in the contributory plan) and an actuarially determined rate of investment return are adequate to accumulate sufficient assets to pay benefits when due. According to the ERS, employer contributions consists of "normal costs" plus level annual payments required to amortize the unfunded actuarial accrued liability (UAAL). Normal costs is the level percentage of payroll contribution required to accumulate the needed funds to pay all benefits earned during the current year by the issuer's current employees. UAAL is the actuarially accrued amount by which the present value of projected benefits exceeds fund assets.
The legislature further finds that the two and one-half year downturn in the stock market has resulted in investment earnings and valuations for fiscal years 2001 and 2002 were negative. As a result, state and county employers will be faced with substantial increases in their required contributions unless amortization of the UAAL is extended beyond June 30, 2016. Lowering the employer contributions, however, would mean that full funding of the system will take longer. Hawaii is currently 84 per cent funded, down from 94 per cent last year. In fiscal year 2000, 33 of 46 retirement systems surveyed were 90 per cent or more funded.
The legislature further finds that an alternative to increasing the employer's contribution is to replace all or a portion of the contribution with debt, through the issuance of pension obligation bonds (POBs). POBs would replace the employer's fluctuating annual UAAL amortization payments with fixed debt service payments. The proceeds of the bond sales would be used to pay all or a portion of the employer's contribution to the ERS.
Many local government units in California, Pennsylvania, New York, Connecticut, Oregon, Florida, New Jersey, Maryland, Colorado, Tennessee, Ohio. Louisiana, Maine, Massachusetts, Indiana, and Rhode Island have used POBs to fund a portion of the UAAL. To date only two state governments (New Jersey and New York) have issued POBs, but other state governments, including West Virginia, are considering this option. POBs are often used to provide near term budget relief, the amount of which depends on the structure of the POB issue and current or expected UAAL amortization. In order for a POB issuer to benefit from the issuance of POBs, the right interest rate environment is necessary, because severe asset depreciation in the initial years of the POB issuance could make recovery impossible without significant above-trend appreciation in future years. Conversely, high appreciation in early years significantly increases the probability of realized (or exceeding) projected benefit.
The legislature believes that POBs have the following benefits:
(1) POBs are generally good for pension funds in that they fully fund the systems immediately and not at some point in the future;
(2) In the right interest rate environment, POBs can create economic benefits (for example, borrowing at six per cent and reinvesting at eight per cent);
(3) POBs can yield possible cash flow savings due to longer amortization of debt (annual payment contributions would be less and more consistent with employer contributions under the old system of required employee contributions); and
(4) The structure of the debt may provide budget relief (initial funding could cover normal costs as well as UAAL, and be structured so that the first debt payment on the issuance would not occur until fiscal year 2005).
The purpose of this Act is to authorize the State and counties to issue general obligation bonds in the name of pension obligation bonds to finance contributions to the ERS.
SECTION 2. Chapter 39, Hawaii Revised Statutes, is amended by adding a new section to part I to be appropriately designated and to read as follows:
"§39- General obligation bonds; use for funding public employee pensions; authorized. (a) In addition to the authority to issue general obligation bonds under section 39-1, and the application of proceeds therefrom pursuant to section 39-2, the director of finance of the State, with the approval of the governor, may issue in accordance with the limitations provided in subsection (b), general obligation bonds of the State issued for the purpose of funding the State's contributions to the employees' retirement system pursuant to section 88-123, in an amount not exceeding the total amount of those bonds authorized to be issued by acts of the legislature and any amendments thereto in effect at the date of issue of the bonds, and not exceeding the debt limitations prescribed by the Constitution of the State of Hawaii. Except as otherwise specifically provided in the act or acts authorizing the issuance thereof, the bonds shall be issued in the manner and upon the terms provided in this part and shall be known as "pension obligation bonds".
(b) For purposes of subsection (a), the director of finance shall consider:
(1) Security for the bonds, rating agency perspectives, structure of savings, impact of lump sum funding, asset allocation review, redemption features, high cost of call option, and bond insurance; and
(2) Risk factors, including flexibility risk, reinvestment risk, and funding discipline risk."
SECTION 3. Chapter 47, Hawaii Revised Statutes, is amended by adding a new section to part I to be appropriately designated and to read as follows:
"§47- General obligation bonds; use for funding public employee pensions; authorized. (a) In addition to the authority to issue general obligation bonds under section 47-3, and the application of proceeds therefrom pursuant to section 47-5, the director of finance may issue in accordance with the limitations provided in subsection (b), general obligation bonds issued for the purpose of funding a county's contributions to the employees' retirement system pursuant to section 88-123, in an amount not exceeding the total amount of those bonds authorized to be issued by acts of the county's governing body and any amendments thereto in effect at the date of issue of the bonds, and not exceeding the debt limitations prescribed by the Constitution of the State of Hawaii. Except as otherwise specifically provided in the act or acts authorizing the issuance thereof, the bonds shall be issued in the manner and upon the terms provided in this part and shall be known as pension obligation bonds.
(b) For purposes of subsection (a), the director of finance shall consider:
(1) Security for the bonds, rating agency perspectives, structure of savings, impact of lump sum funding, asset allocation review, redemption features, high cost of call option, and municipal bond insurance; and
(2) Risk factors, including flexibility risk, reinvestment risk, and funding discipline risk."
SECTION 4. New statutory material is underscored.
SECTION 5. This Act shall take effect upon its approval.
INTRODUCED BY: |
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