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Walker administration resurrects plan to borrow for pension shortfall

  • Author: Nathaniel Herz
  • Updated: September 20, 2016
  • Published September 19, 2016

Alaska Gov. Bill Walker's administration is resurrecting a stalled plan under which it would use borrowed money to reduce the hundreds of millions of dollars that the state pays into its pension funds each year.

The plan calls for as much as $3.2 billion in borrowing through pension obligation bonds, according to a letter to state lawmakers sent by Revenue Commissioner Randy Hoffbeck last week.

Walker's administration considered a similar plan earlier this year but ultimately dropped it after lawmakers gave the complicated plan a hostile reception, citing its potential risks.

At the time, Hoffbeck said the borrowing wouldn't happen without legislative approval. But now, since lawmakers aren't in session, Walker's administration isn't expecting to seek permission, said Jerry Burnett, deputy revenue commissioner.

The executive branch, through a state corporation led by top Walker administration officials, can unilaterally issue up to $5 billion in pension obligation bonds without legislative approval based on 2008 legislation sponsored by Rep. Mike Hawker, R-Anchorage.

Lawmakers would ultimately have to appropriate money to pay back the borrowed cash, however.

Hoffbeck, Burnett, and two other Walker administration officials were traveling to New York City on Monday to discuss the bonds with financial firms and ratings agencies.

A meeting of the state corporation, the Pension Obligation Bond Corp., is scheduled for next week, when a resolution to approve issuing the bonds is up for consideration.

The corporation's board members are three deputy commissioners in Walker's administration: Burnett, John Boucher of the administration department, and Fred Parady of the commerce department.

One member of the House leadership, Fairbanks Republican Rep. Steve Thompson, said he wanted more information about the transaction before it went forward.

"On the surface, it sounds good. But what's the downside?" Thompson, a co-chair of the House Finance Committee, said in a phone interview Monday. "We've got to get some answers, I think, before we move forward with it."

Here's how the pension obligation bonds would work:

Each year, Alaska pays hundreds of millions of dollars into the pension systems, which cover retired teachers and other public employees.

A portion of those annual payments covers a funding shortfall, plus 8 percent — the state's assumed rate of return on the money that's currently in the pension funds.

Under the Walker administration's preliminary proposal, the state would borrow as much as $3.2 billion using pension bonds.

The borrowed money would then be invested in the pension funds to cover a big chunk of the shortfall. And instead of paying the 8 percent interest rate it's currently paying on the shortfall, the state expects that it would be paying less than 4 percent interest on the bonds.

The state would still have to pay back the borrowed money. But if all the assumptions are borne out, those payments would cost less than if the pension shortfall was paid back bit by bit, resulting in significant savings.

Initial projections say the state could save more than $500 million on payments to the teachers pension system alone over the 23-year lifetime of the bonds.

Burnett compared the transaction to refinancing a home mortgage and said it would be "next to impossible for it to be a bad deal over a long period." He acknowledged, however, that it could "look really bad" if the state borrowed the money and the market crashed soon afterward, because then the state would be faced with the same pension shortfall, plus a new obligation to pay back the cash it just borrowed.

The bonds have drawn criticism from some financial experts for the risks involved, and because some governments have favored them as a type of accounting trick to facilitate payments into a pension system that are lower than they're supposed to be, according to an analysis by the website ProPublica.

The Government Finance Officers Association counsels against the bonds due to their complexity and potential risk.

The effectiveness of the bonds depends on how they're timed, said Matt Fabian, an analyst and partner at Municipal Market Analytics, a financial research firm based in Massachusetts.

They can pay off if the economy is growing, he said.

"Every pension bond isn't a bad bond. But every pension bond has some risks," Fabian said in a phone interview Monday. "It could increase the long-term cost to the state if the investments underperform, or are ultimately lost in the market."

Hoffbeck, in his letter to lawmakers, said there's currently an "opportunity" in the market, with interest rates dropping by 1 percent since the first proposed version of the bonds — an opportunity that could produce savings and consistency in the state's pension payments, he said.

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