WASHINGTON — West Virginia plans to sell at least $800 million of tobacco settlement bonds to help shore up its woefully underfunded teachers pension plan, state officials said this week, days after the Legislature approved the measure at the close of its annual two-month legislative session.
State lawmakers were expected to remain in Charleston through the weekend in an extended session to hammer out minor changes to Gov. Joe Manchin 3d’s proposed $3.9 billion fiscal 2008 budget, but all other business ended at the close of the regular session Saturday night.
Joe Martin, Manchin’s deputy chief of staff, said that the tobacco deal would only proceed if the state received a minimum of $800 million from the sale. West Virginia receives about $70 million annually under the 1998 Master Settlement Agreement between the tobacco industry and 46 states, according to a draft of the tobacco legislation.
By using tobacco bonds to shore up the state’s underfunded teachers pension system, which is only funded at about 30% of the $5 billion that’s required, the state is essentially accomplishing through the Legislature what it failed to achieve in a June 2005 special election.
In that special election, voters narrowly rejected a plan that would have authorized up to $5.5 billion of general obligation bonds to pay the teacher pension liabilities, which at the time were valued at between $4 billion and $5 billion.
Manchin pushed the deal as a way to level the annual payments the state would have to make to pay off the liability over the next 30 years at about $350 million. But voters, who must approve all bond deals backed by general fund revenue, said no.
As a so-called special revenue source, tobacco settlement dollars can be leveraged without voter approval.
Citigroup Investment Banking will manage the sale, Martin said. Public Resources Advisory Group is the financial adviser, and Charleston-based Goodwin & Goodwin LLP and Orrick, Herrington & Sutcliffe LLP are co-bond counsel.
Proceeds from the sale, which would be backed by tobacco payments through about 2027, would boost the teachers pension funding to just under 50% and level annual payments at about $300 million, Martin said.
“We can handle that with some ease,” he said.
Currently, the teachers pension system serves about 27,400 retirees and 18,600 active teachers, according to Diane Holley, assistant director for the state department of purchasing.
Martin noted that the Manchin administration has already diverted about $670 million to the pension system in the past two fiscal years. Those payments, plus the tobacco bond proceeds and an additional $58.9 million authorized for fiscal 2008, which begins July 1, would translate into an additional $1.5 billion in funding for the pension system above the $350 million the state currently contributes.
Analysts said the market, which gobbled up a $4.5 billion tobacco settlement securitization in California last week, could easily absorb the tobacco deal.
“Based on California, this is still a sellers market,” said Dick Larkin, an analyst at JB Hanauer & Co. “I don’t know that the market can get much better.”
Larkin said the only downside risk stems from the possibility of continued reductions in payments from the tobacco companies that signed the MSA as they compensate for market share reductions from non-participating manufacturers, or NPMs.
The agreement allows tobacco companies to reduce their payments if they experience annual market share losses greater than 2% to NPMs and if an independent arbiter rules that participation by tobacco companies in the MSA was a significant contributing factor to the companies’ market share losses.
Additionally, companies must also prove that state attorneys general did not adequately enforce statutes required by the MSA mandating that NPMs make payments into state-monitored escrow accounts that would be tapped should any sick smokers sue the NPMs.
In 2006, states received MSA payments totaling $800 million less than expected as some tobacco companies — citing market share losses and a lack of diligent enforcement of the escrow statues — either placed part of their payments into a so-called dispute account or withheld their NPM adjustments altogether.
“Even when the big tobacco companies held back, that didn’t seem to put a dent in the market,” Larkin said. “If last year is any sort of example, [issuers] might continue to have market access despite this bad news.”
In interdealer trades larger than $1 million yesterday, Golden State Tobacco Securitization Corp. 5s of 2033 yielded 5.04%. These bonds were initially offered in early March at 5.16%, a difference of 12 basis points. This firming has occurred throughout the yield curve on the California tobacco credit and has reaffirmed market interest in tobacco, analysts say.
Aside from the tobacco legislation, the Legislature passed no other major bond bills. The Senate Friday approved a $79 million bond package to finance building projects at community and technical colleges, but that died when the House failed to consider it. Martin said that although the bill was uncontroversial, it was introduced too late in the session.
Meanwhile, a separate bill that Manchin may veto would require lawmakers to sign off on all toll increases along the 88-mile West Virginia Turnpike, which is overseen by the West Virginia Parkways, Economic Development & Tourism Authority.
The authority had planned to sell $100 million of tax-exempt, toll-backed revenue bonds last year — debt that would have been funded mostly by 60% toll increases on the highway. But the toll hikes were met with scorn by legislators who saw them as an undue burden on West Virginians in the southern part of the state who rely on the highway. The authority has held off on the bond sale until the political fall-out is resolved.
Manchin has expressed concerned that the legislation may indirectly harm the authority’s bond rating by making it more difficult to raise money to back new debt. Martin said Manchin’s legal staff and revenue experts were reviewing the bill and the governor would decide to veto or sign it within the next two weeks.
State law places a cap of $200 million on the amount of debt the authority can have outstanding at any given time. In 1989, it issued $143 million of partial refunding revenue bonds, of which $98 million is still outstanding. Standard & Poor’s rates the debt AA-minus and Moody’s Investors Service rates it Aa3.
