JUNEAU -- Former Gov. Sean Parnell's plan for dealing with Alaska's troubled and underfunded retirement system called for borrowing money to pay this year's costs and deferring repayment of the debt to future administrators and legislators, according to the Parnell administration budget released Friday by new Gov. Bill Walker.
What the budget shows is Parnell appeared ready to issue what are known as "pension obligation bonds," and selling those bonds on Wall Street. It would then use the money raised to make statutorily required $257 million payment into the retirement trust funds for teacher, city and state employees' already incurred pension and health care obligations for fiscal year 2016.
But one legislator called that a "smoke and mirrors" budget tactic and said he expects Walker to make numerous budgetary changes when he delves into the budget left by Parnell.
"I'm not a big fan of pension obligation bonds; it's playing arbitrage and potentially exposing the state to hundreds of millions if not billions more debt exposure," said Sen. Bert Stedman, R-Sitka, who had previously tried to block approval of pension obligation bonds in the Legislature.
But another of the state's most financially astute legislators says pension obligation bonds might be part of the solution for Alaska, and the state's reluctance to use them so far may have cost it big.
"I'm glad to see they're at least looking at it," said Rep. Mike Hawker, R-Anchorage.
"One of the great lost opportunities was not taking advantage of that legislation earlier."
The way POBs are supposed to work is the process of arbitrage, where a government with unfunded pension liability issues bonds at low interest rates and then invests the borrowed money in stocks or other investments that it expects to go up. The difference between the cost to pay off the bonds and the stock market earnings is the arbitrage amount.
But if those investments fall instead of rise, the state could be farther in the hole.
State investment managers said publicly just a day earlier stocks appear so pricey after years of gains they may be headed for a fall, and they recommended moving to less lucrative but less risky investments.
Stedman questioned the timing as well.
"You are basically playing arbitrage, and if you have a five-year or six-year bull market you'd better be careful," he said.
That's what nearly happened the last time the state flirted with POBs.
Bonding advocate Hawker persuaded the Legislature in 2008 to try POBs, and it authorized the issuance of up to $5 billion in the bonds. But before any were issued, the market took a dizzying drop and the plans were shelved.
"Had we done a substantial pension obligation transaction then we would have largely resolved the underfunded status of the pension today," Hawker said.
The same may not hold true with the current fiscal environment, he said.
"I don't know that the market conditions today are such that a large transaction is advisable. A smaller transaction may well be advisable. You'd have to look at the specific execution," Hawker said.
Borrowing money to make required payments on the unfunded pension liability can make annual budget deficits looks smaller, but state leaders have another option as well: They can change the law so the state owes its retirement trust funds less.
That's the tack they took last session, reducing the more than $1 billion pension contribution set by the Alaska Retirement Management Board to about a quarter of that amount. That made the state budget easier to balance, but the debt then takes longer to pay off. Actuary David Slishinsky of Buck Consultants told the retirement board last week changes made by legislators will add nearly $5 billion to total retirement costs and extend payments for nine years. That will include more than $2 billion in additional costs shifted to local governments and school districts.
Actuaries have spent months reviewing the interrelated impacts of last session's legislative changes, many of which were added late in the session with little public discussion.
That comes despite the state last session opting to take $3 billion out of savings to shore up the Public Employees' Retirement Systems and the Teachers' Retirement System.
Members of the retirement board had already expressed concern that state funding for the pension liability of $257 million for the 2016 fiscal year was inadequate.
In a 5-4 vote in September, the board rejected a resolution calling for additional funding, with opposition led by two Parnell administration officials: Curtis Thayer, commissioner of the Department of Administration, and Angela Rodell, commissioner of the Department of Revenue.
The board, meeting in Anchorage last week, could have reconsidered that motion without those members, but it declined to do so.
"It's real clear that a lot has changed in recent months, and I think the board needs to change its approach to this whole issue based on oil prices and a new administration," said Sam Trivette, a retired public employee who serves as the board's vice-chair.
The retirement board was created by the Legislature in 2005 following the surprise news of billions of dollars in unfunded pension obligation.
The board oversees the retirement trust funds and monitors actuarial estimates, but was also given power to set annual contributions to pay down the unfunded liability. But when the board raised those required payments, the Legislature overruled it and passed legislation last session requiring the lower payments.