The Anchorage Assembly recently approved Ordinance No. AO 2017-133, authorizing Mayor Ethan Berkowitz's plan to incur $68 million in pension-related debt, leveraging municipal property in the process. The minor and myopic advantages of this are eclipsed by significant risk, new and unnecessary long-term debt, and liabilities. Residents may be facing new and/or higher taxes in coming years.
Under Berkowitz's plan, $68 million, collateralized by municipal property, will be transferred in lump sum to the Police and Fire Retirement System. Currently, the municipality is required to make an annual $10.3 million payment to the PFRS for the next six years, payments required under a settlement agreement that resolved PFRS litigation during the 1990s. These payments were a known quantity, consistently budgeted for and terminated in six years.
Berkowitz's plan involves "Certificates of Participation," similar in concept to the $3.5 billion in pension obligation bonds that the Walker administration tried, and failed, to sell in 2016. The memorandum accompanying the ordinance defines certificates of participation as a secured interest in municipal property; the municipality essentially repays its debt by making lease payments on its own property. Until then, the property is held by a trustee for the creditors. The properties at risk have not been disclosed to the Assembly. That list is compiled solely by the Anchorage chief fiscal officer.
According to the Ordinance Summary of Economic Effects, the current $10.3 million annual obligation, which terminates in six years, vanishes from the municipality's budget. But, before anyone gets too excited, the debt service of the new loan begins in FY2019 at an annual rate of $6.4 million and lasts until 2033. The net annual savings to the municipality for the next six years is only $3.9 million.
Further, the lump-sum payment to the PFRS raises funding levels from 80 percent funded to approximately 88 percent funded (based on numbers from a recent PFRS newsletter; the memorandum claims 90 percent). Berkowitz gambles that the remaining funding gap can be closed by the PFRS investing the lump-sum payment. For this gamble to work, the current high-yield environment in equity markets would have to continue well into the future.
Berkowitz's plan has major flaws that expose Anchorage taxpayers to significant risk and long-term liabilities. First, the municipality must pay back not only the $68 million principal but also interest. We are now saddled with a new, $6.4 million annual liability until at least 2033.
Second, transferring municipal property to a trustee sets up a perennial lost opportunity to appropriate potential lease revenues to the budget, eliminating a revenue stream that mitigates the tax burden on property owners and transferring it to our new creditors.
Third, if the municipality defaults, our new creditors could foreclose on municipal property. These are our fire stations, police headquarters, snow plows, etc. At this point, one can only speculate what property is actually encumbered since those selections rest solely with the chief fiscal officer.
Finally, and most concerning, much of the $68 million paid to the PFRS could vanish in an equity market correction or crash. This would create yet another funding shortfall for taxpayers to fill in addition to paying down our new debt obligation. According to the PFRS newsletter, since 2010 the pension fund has enjoyed positive, annual returns consistent with the nearly decade-long climb we have seen in equity markets, an arguably historic anomaly. Typically, an uninterrupted climb only lasts three to four years.
Nobody can predict when the next correction or crash in equity markets will occur. Similarly, nobody can reasonably rely on continued, record growth in equity markets that are, according to conventional wisdom and the lessons of history, long overdue for a correction. Worse, if equity markets are at the edge of a "bubble" that bursts, a significant portion of this $68 million could quickly disintegrate. By maintaining a consistent, annual payment into the PFRS, the municipality hedged against that risk by allowing the PFRS to respond to changing market conditions and alter its investment strategy with each payment.
This is a lesson that has already been learned by the municipality and throughout the Lower 48. Equity markets lost approximately 50 percent of their value between 2000 and 2002 during the first dot-com bubble burst and again in 2008 precipitating the Great Recession. The memorandum admits that from 1997 to 2009, the PFRS went from being overfunded to 75 percent funded in part as a result of these crashes.
As reported by Pew Charitable Trusts, other municipalities that took on pension-related debt preceding these market crashes have witnessed disastrous results. For example, Stockton, California, similar in population numbers to Anchorage, declared bankruptcy in 2012 due to its 2007 sale of $125 million in pension obligation bonds. Equity markets crashed in 2008. As part of its bankruptcy plan, Stockton now has a 9 percent sales tax. Detroit, a city with a 2.4 percent municipal income tax and 6 percent sales tax learned a similar lesson and filed for bankruptcy in 2013 for many of the same reasons.
On a larger scale, Illinois issued pension bonds throughout the mid-2000s. After 2008, the state was unable to pay both its pension obligations and incurred debt. Their legislature then increased personal income taxes 67 percent in 2011 and another 32 percent in 2017, along with other new taxes.
Anchorage should avoid joining the myriad examples of cities and states that have tried iterations of what the Berkowitz administration intends. Instead, let's curtail our reckless borrowing and spending before we unnecessarily burden not only ourselves, but also the next generation of Anchorage residents with new liabilities and taxes.
Peter J. Caltagirone is an Anchorage resident, property owner and trial lawyer licensed in five states, specializing in oil and gas-related litigation.
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