By David G. Barry
The State of Wisconsin Investment Board (WSIB) has
been given the green light to potentially be the first U.S. pension plan to
issue debt.
Seeking alternative ways to implement leverage, WSIB has received acknowledgement
from Wisconsin Attorney General Josh Kaul that issuing debt is consistent with
a 2008 ruling related to its ability to manage money and property in a prudent
manner.
An independent agency, WSIB manages the Core Retirement Trust and the Variable
Retirement Trust. It ended 2021 with $147 billion in assets, with $136 billion in
the Core fund. The Variable fund is subject to another statute, which limits it
to investing in equities.
In his ruling, Kaul said that consistent with the 2008 opinion, “WSIB’s broad
management authority would apply equally to debt issuance as a management
strategy for the Core fund” and as a result, “WSIB would have the statuary
authority to issue debt as part of its Core fund management authority if the
statutory ‘prudent person’ standard is met.”
In a letter to Kaul in December, WSIB’s chief legal counsel, Sara Chandler,
said WSIB believed it had the authority to issue debt but that it wanted the
AG’s opinion in order to demonstrate to debt purchasers that it had the
statuary right to do so.
WSIB, according to Chandler’s missive, would use debt as another option of its
leverage program.
Since 2012, WSIB has used leverage as a means of increasing returns and
decreasing risk. Leverage, it said, provides an opportunity to increase the
diversification of the Core fund by reducing its concentration. That, in turn,
reduces risk.
WSIB has had the authority to leverage its fund up to 15%, meaning it invests
$115 for every $100 of cash on hand. To date, it has done so by investing in
financial instruments that can be bought without full payment being required at
the time of purchase and using securities it has as collateral for other
investments.
The agency has not previously sought to issue debt because its other methods
have generated “enhanced returns” and it did not have “express authority” to do
so, according to Chandler’s letter.
But wanting “flexibility to adapt to ever-changing market dynamics,” it sought
the AG’s approval.
If WSIB does indeed issue debt, it would not be the first pension fund. The
Canada Pension Plan Investment Board (CPP Investments), the Public Sector
Pension Investment Board (PSP Investments) and Ontario Teachers’ Pension Plan
all do so. WSIB, however, said it is not aware of any U.S. public pension funds
having done so.
A key reason is most are not fully funded – WSIB is one of the few that is. As
a result, it assumes that its debt would be rated AA or above – like what the
Canadian pension funds’ debt is rated.
Kahn’s ruling does not mean that WSIB can immediately issue debt. Its program
would still need approval from the WSIB Board of Trustees to be implemented.