WAPA moves to reduce $62.5M liability linked to retirees' benefits
Published: September 25, 2013
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ST. THOMAS - The V.I. Water and Power Authority board approved a policy Tuesday to "reduce and control" a $62.5 million liability related to health insurance benefits for retirees and prospective retirees during the next 20 years.
Board member Gerald Groner said it was the first step toward addressing what has become for all public entities a "very large elephant in the room" since the institution of new governmental accounting standards for public institutions.
Governmental Accounting Standards Board Statement No. 45 mandates that public institutions report not just their annual insurance premiums but how much they actually are obligated to pay under all existing agreements with beneficiaries.
Consultants from Buck Consulting Group gave a presentation via teleconference to the WAPA board about the requirements that state and local governments report all the money tied to "other post-employment benefits" in financial statements.
The effect of this disclosure could negatively impact credit ratings as such a large sum traditionally has not been included in balance sheets, according to Buck consultant Phillip Bonanno.
The consultants recommended that WAPA establish a practice of "pre-funding," which would mean setting aside a chunk of money over and above the current year's premiums into an investment portfolio. Pre-funding would allow creditors to see that WAPA has taken steps to mitigate the liability.
Many governmental entities have opted to do pre-funding since the new accounting standards went into effect, Bonanno said.
"I liken it to a situation where a person with a household budget is applying to a bank for credit, and the student loans and the credit card balances have not up until now been required to be included in the application," Groner said. "Now you include that debt and the application suddenly is not so appealing to the bank."
Some of WAPA's bonds are hovering just above junk status, having been downgraded by Moody's Investor Services in late August.
Many institutions also had chosen to establish trust funds so that the money owed to retirees for the benefits would be protected from being diverted to other purposes, according to Bonanno.
Bonanno said that the $62.5 million liability was not excessive compared with other entities.
"There was nothing about it that blew us away," he told board members. He also said that nothing about prefunding arrangements precludes WAPA from making adjustments to benefits it plans to offer retirees in the future.
Groner said a re-examination of what WAPA could afford to offer in terms of future post-employment benefits would be the obvious next step.
The amount the board voted to authorize to start a pre-funding account is $4,673,527, which has been included in the base rate case now pending before the V.I. Public Services Commission.
WAPA executive director Hugo Hodge Jr. said that the Public Services Commission's own consultants, Georgetown Consultant Group, had figured the amount needed to be about $4.1 million and pointed out that the establishment of a prefunding portfolio would depend on the approval of the base rate increase.
Target rates of return on investment for prefunding accounts are about 7 percent, according to Bonanno. Some board members expressed skepticism that present market conditions could support such a high rate of return.
"Under today's environment, it would be kind of hard to get," Maurice Sebastien, WAPA's assistant chief financial officer said after the meeting. He said that such a goal would not put pressure on WAPA to engage in higher risk investments.
However, to aim below 7 percent by opting for a more fiscally conservative investment structure jeopardizes the chances that ratings agencies and creditors will feel confident that the liabilities have been sufficiently addressed.
In other business Tuesday, the board:
- Authorized a change order for an amount not to exceed $300,000 to be paid to SAIC, Energy, Environment and Infrastructure LLC, for the purchase and implementation of an interactive voice response and outage management system. The purpose of the system is to shorten the duration of outages by predicting vulnerable points in the transmission and distribution lines. It will also provide more accurate information about when power will be restored to the media and to customers. WAPA has been culling data to help rebalance the loads to the lines, thus reducing "line loss." The voice response system will help to handle WAPA's high call volume during outages, according to Clinton Hedrington, WAPA's director of transmission and distribution.
- Authorized the extension of maturity dates for the $10 million V.I. Water and Power Authority General Obligation Note Electric System Working Capital 2008 Series C Note through Banco Popular from Dec. 25, 2013, to June 25, 2016. The $10 million line of credit is half of a $20 million credit package for working capital. The other half is through First Bank Puerto Rico. WAPA's current indebtedness under the Banco Popular line is $6 million.
- Added $50,000 to a $325,000 contract with SAIC Energy, Environment and Infrastructure for consulting related to WAPA's 2012 base rate increase petitions. Hodge said that the Public Services Commission's requests for information had become voluminous, "unto the point that we have had to ask the PSC to follow case law" and that this had extended the amount of work required from the consultants. The total amount of the contract is now $375,000.
- Contact Amanda Norris at 714-9104 or email firstname.lastname@example.org.