State sees bonds as investment capital to close unfunded pension gap

By Kirsten Adams

June 14, 2010

Selling up to $5 billion in bonds could either place Alaska further in the red or, as State officials hope, successfully decrease the multi-billion dollar pension unfunded liability.

Deputy Commissioner of Revenue Jerry Burnett said the State would invest the bond proceeds into the pension trusts with the hope the extra funds would earn more than the original cost of the bonds.

“We believed we could borrow money at 5 percent and the long term earnings on pension funds was around 8 percent,” Burnett said. “We look at this as a tool.”

Legislation in 2008 authorized the Alaska Housing Finance Corporation and the Alaska Municipal Bond Bank to issue bonds, and created the Alaska Pension Obligation Bonding Corporation.

A presentation by Buck Consultants estimates the total liability for the Public Employees Retirement System and the Teachers Retirement System at $24 billion with an unfunded liability of $10 billion, and Burnett said the bonds could potentially reduce the unfunded amount by as much as $1 billion.

If the market takes a turn for the worse, however, the move could increase the liability by untold amounts.

“It’s been a very volatile market and for the last ten years the equity market hasn’t returned anything, so it wouldn’t have worked well over the last ten year period,” Burnett said. “The only thing we can control is the investment rate at which we borrow it. Since August 2008 there has not been a time when it would be favorable for us to borrow money.”

State Debt Manager Deven Mitchell said the State first planned to sell the bonds in November of 2008, but changed plans when the economy crumbled in October of that year.

While issuing bonds to fund pension liabilities is a fairly widespread practice, State Debt Manager Deven Mitchell said results are mixed and dependent on 20-year market cycles. When bonds are sold with a fixed interest rate of less than 6 percent, there is still a 20 percent chance the State would lose money on the deal by the time the bond matured.

“I’m an official, if I make a decision that saves money, people say ‘oh, good job,’ but if I make a decision that loses a little bit, it’ll make headlines,” Mitchell said. “Government is penalized for failing and it’s ignored for success but it’s that public perception that stops it a lot of times.”

Now, as the market slowly recovers and Alaska faces a steadily increasing pension liability, Mitchell said the State would consider bond sales to reduce the $10 billion pension program unfunded liability.

“It’s all market timing,” Mitchell said. “I think interest rates would need to be extraordinarily compelling.”

Kirsten Adams is an investigative reporter with the Alaska Watchdog. She can be reached at kadams@alaskapolicyforum.org.

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