Dear Source:
Bill 26-0200 and its amendments propose 'saving GERS' by passing legislation to acquire pension obligation bonds (POB) now to be referred to as pension finance bonds (PFB) but little discussion about the payback of the POB/PFB itself. Bill 26-0200 may be on the backburner but the move to acquire the POB/PFB is on the agenda as a Bill without a published number for a possible session before the end of the 26th Legislature.
Written testimonies were presented on behalf of the Governor's Office of Fiscal & Economic Recovery (GOF&ER) and the Banc of America Securities (BAS). GOF&ER (page 3 of written presentation) referred to bill 26-0344. The bill authorized a 'Service Contract' between the Government and the PFA. The PFA would then provide funding for a portion of the unfunded GERS liability. GOF&ER stated that the issuance of these bonds would create a significant impact on the Government's cash flow (pg. 6). The short and long term consequences on the Government's cash flow were not addressed.
The process the Government would use to acquire a $400 million dollar POB/PFB appeared convoluted but the POB/PFB payback seemed straightforward. BAS equated the 'Service Contract' to a mortgage paid off over time (pg. 7 of the written presentation). Page 16 spelled out the terms for the VI Government acquisition of the $400 million dollar POB; the issuance of $446 million dollars par 30-year Taxable bonds with an annual debt service of $30.1 million dollars, a Bond Insurance Premium of $13.4 million dollars (possibly a one time expense), a stipulation that there will be a dedicated revenue stream/ streams to make payments due under the 'Service Contract' (pg. 14), and that POB/PFB payments are not subject to further appropriation risk (pg. 13). There was mention of other fees and possible expenses.
Going back to the mortgage analogy, this appeared to be akin to a 30-year interest-only mortgage, mandated insurance with a balloon payment of the principal, or $30.1 million dollars per year for 30 years (903 million), plus the balloon principle (446 million dollars). This $1,349,000,000 does not include those other fees and possible expenses.
Paying out 1.349 billion dollars will not insure the solvency of GERS. The POB/PFB only deals with part of today's GERS unfunded liability. When the 'unnumbered' bill is passed into law, the government employee retirement expense will equal the POB/PFB debt payment PLUS annual contributions to GERS (pg. 11). The POB/PFB does not relieve the Government of its responsibility to make legally mandated contributions to GERS going forward. However, this discussion focuses on the Government's substituting a 400 million dollar debt with a 1.349 billion dollar obligation. So, returning to the original question.
Who are the 'guaranteed beneficiaries' of the Pension (Obligation/Finance) Bond? Given the conditions of the "Service Contract' as proposed by BAS, the answer can only be: the bondholders and the financial advisors who manage the process.
Patricia G. Oliver
St. Croix
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