The Walker administration has put its plan to sell up to $3.3 billion in pension obligation bonds on hold.
Gov. Bill Walker said Tuesday in a statement from his office that concerns from the members of the Senate Finance Committee about the proposal led him to hit the pause button.
“While we believe the financial benefits of issuing state pension obligation bonds significantly outweigh the financial risks, we recognize the need for legislative input. I invited the Senate Finance Committee to meet with administration officials and me this week to discuss the transaction,” Walker said. “Given their lack of support, I have decided not to proceed with the issuance at this time. Building a collaborative relationship with the Legislature will be necessary to reach our primary goal, which is a long-term fiscal plan for our state. In this time of fiscal uncertainty it is critical that both branches of government work together to address all the difficult decisions that stand before us.”
Senate Finance held a meeting Sept. 29 to hear from Revenue Commissioner Randy Hoffbeck and other department leaders about the proposal to sell between $2.3 billion and $3.3 billion in appropriation bonds to help fund the state’s $24.5 billion Public Employee and Teachers’ Retirement systems, which are currently underfunded by about $6 billion. House Finance members also attended that meeting and the legislators were generally skeptical, with some outwardly opposed to the idea.
Pension obligation bonds sometimes sold by state and local governments in an attempt to capture the difference in the interest rate the bonds are sold at and the returns the invested bond monies can generate. The state Revenue officials said they were hoping to sell the bonds at a fixed interest rate of no more than 4 percent and subsequently invest the bonds to get an 8 percent return, which would be equal to the return already projected for the PERS and TRS funds.
Doing so would gradually reduce the state’s annual pension obligation payments, which are projected to grow from about $215 million this year to more than $860 million in 2039 when the defined benefit retirement plans are projected to expire. The idea of selling pension bonds was first floated in January during the legislative session, but higher interest rates and a general disinterest in the idea from legislators focused on other pressing financial issues dissuaded the administration from taking action then.
On Oct. 7, the state received opinions from the three major credit ratings agencies saying the bonds would likely be rated at AA or AA-, or slightly below the state’s general obligation rating. That would be normal for bonds that require annual legislative appropriations for debt service payments.
S&P Global Ratings also placed the State of Alaska back on its CreditWatch program and said the bond sale would likely force the agency to lower the state’s current AA+ rating to AA because of the increased debt load.
All three ratings agencies lowered Alaska’s formerly sterling general obligation AAA credit rating last winter as legislators and the Walker administration tried to close the state’s budget deficit, which at the time was projected to be close to $4 billion.
The bonds were expected to be priced on Oct. 26 and closed on the first week of November had the administration proceeded with the sale.
Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.
