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Editorial - Can stocks curb tax hikes?

June 30, 1997

Play it safe and face higher taxes, or take some risks and reap the rewards. That's the choice facing West Virginia taxpayers who must decide whether to amend their state's constitution to allow the state to cash in on the soaring success of the stock market.

It's not just a discussion about investment philosophy. According to House Speaker Bob Kiss, D-Raleigh, if the state isn't allowed to invest in more lucrative investments, the legislature will have to raise taxes next year by $100 million. But Kiss told The Associated Press in Charleston that he did not want anyone to "construe that as a threat."

The state faces a dilemma, Kiss said, because it must figure out how to pay for a $3.7 billion debt to the teachers' retirement system. Payments on that debt cost the state $200 million this year, but $100 million in new money will be needed next year.

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Under the state constitution, West Virginia can invest only in bonds, which it projected would earn a 7.5 percent return. In truth, bonds have yielded only a 4 percent return, which means the retirement system comes up short.

The legislature has previously tried to deal with the problem by creating a non-governmental agency to invest state funds, but the idea was challenged in court. Now it's up to state voters to decide whether or not they'll allow state money to move out of the relatively safe (but low-yielding) bond market.

The risk in making such a change is that stocks are more volatile than bonds, and that after a long series of increases, many are wondering when the market will tumble down again.

To convince voters to make the change, lawmakers will have to assure voters that state funds will be in the hands of professional managers with a long track record of increasing investors' assets. That means contracting out the investment function, not to the lowest bidder, but to the one with the best balance sheet. For their part, Kiss and other lawmakers need to educate citizens about investments and the fact that a 4 percent return on your money isn't nearly enough when you're $3.7 billion in debt.

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