State moves to sell pension bonds despite S&P warning

The State of Alaska is continuing the process to sell up to $3.3 billion in pension obligation bonds after receiving mixed reviews from the major credit rating agencies.

On Oct. 7, S&P Global Ratings placed the state on CreditWatch with negative implications and rated the state’s appropriation-backed bonds, such as the pension bonds, as AA-.

The agency indicated in a brief that it would likely lower the state’s general obligation credit rating from AA+ to AA if the bonds were sold.

Appropriation-contingent bonds are often rated at least one notch lower than general obligation debt because of the need for the state Legislature to annually fund their payment.

“The CreditWatch action reflects our view that Alaska’s credit profile would incrementally weaken following the issuance of the proposed $3.3 billion (in) pension obligation bonds,” S&P analyst Gabriel Petek said in a release.

Moody’s Investors Service rated the bonds at Aa3, a rating equivalent to AA-, also on Oct. 7. Fitch ratings gave the potential bond sale an AA rating. Fitch and Moody’s did not indicate they would lower the state’s general obligation rating if the bonds are sold.

Revenue Commissioner Randy Hoffbeck described the prospective bond sale as a “trigger” that would just move up the timing of a potential downgrade.

S&P removed Alaska from its CreditWatch list in August after Gov. Bill Walker vetoed nearly $1.3 billion from the state’s operating budget in an effort to reconcile a $3.2 billion budget deficit.

At the time, S&P said it would probably be forced to lower the state’s credit ratings if a long-term budget solution is not reached during the 2017 legislative session.

State Revenue officials are looking to sell between $2.3 billion and $3.3 billion in bonds to help fund the state’s $24.5 billion Public Employee and Teachers’ Retirement systems, which are currently underfunded by about $6 billion.

Department leaders have said the global market’s appetite for the bonds would ultimately determine the size of the sale.

They are actively marketing the bonds in Asia, Europe and domestically this month with the hope of attracting upwards of $8 billion in potential buyers to drive down the interest rate on the bonds.

Hoffbeck said the agency opinions are slightly better than the state was expecting, so the Revenue Department will continue moving forward with the sale. The bonds are expected to be priced on Oct. 26.

“We actually thought we were going to be AA- across the board, so we actually ended up on the bonds with a little better rating than we thought we were going to end up with,” Hoffbeck said.

“If we can bring in the sale under 4 percent, then we’ll take it all back to the governor and say, ‘Here’s the risk, we’ve got S&P saying they’re going to downgrade us. Here’s the benefits,’ and let the governor give it a thumbs up or a thumbs down.”

The deal could potentially help the state take advantage of low interest rates if investment returns on the bond revenue exceed the interest rate they are sold.

According to Hoffbeck, the state likely won’t sell the bonds if the interest rate on them exceeds 4 percent, while the state’s retirement fund investors aim for 8 percent long-term returns.

Total debt service on $3.3 billion in pension bonds over 23 years at 3.8 percent interest would be just more than $5 billion. The state’s scheduled assistance payments total more than $8 billion over that time without the bonds.

The savings to the state on a $3.3 billion sale would total nearly $3 billion, an average $130.2 million per year on its assistance payments to the retirement funds if the 8 percent long-term return target is met. A 7 percent return would net $1.8 billion, or an average savings of $78.2 million per year.

The 2017 fiscal year retirement assistance payment was $215.8 million. That annual payment is projected to grow to more than $860 million by 2039, which marks the expected end of the closed defined benefit retirement systems and the coinciding maturity of the bonds, according to a Revenue presentation to the Senate Finance Committee.

Legislators briefed on the proposal have exuded skepticism, noting market uncertainties and states and large cities that have sold pension bonds only to see their situations worsen years later.

Hoffbeck and Deputy Revenue Commissioner Jerry Burnett are quick to point out problems with pension bonds in other states often arise from trying to capture the savings up front, resulting in back-loaded principal payments. Alaska’s plan calls for principal payments to peak at about $220 million in the last years of the bond terms.

Additionally, states such as Illinois, Michigan and California — less than stellar financial performers — have sold bonds from a worse starting position than Alaska, making for less friendly deal terms.

Also, the bonds would only be sold with a fixed interest rate, the Revenue Department has stressed.

State debt manager Deven Mitchell, a nonpolitical Revenue official, has acknowledged the inherent risk in banking on an investment return, but also said the state has structured the deal as conservatively as possible.

According to the department, the rolling 20-year investment return average for the retirement funds has been between 6.7 percent and 8 percent since 2009, a period that includes both the 2001 and 2008 financial market contractions.

Achieving just a 4 percent investment return, or one equal to the interest on the bonds, would make the deal a wash.

In testimony to Senate Finance in September, Hoffbeck said the amount of money the state would lose on the bonds with a sub-4 percent return would be considered “a rounding error” compared to the larger problem the state would have with the overall retirement system because the bond revenue would be invested alongside the $24.5 billion currently in the funds.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

More in News

A map of the Johnson Tract Mine exploration project. Photo courtesy of the Center for Biological Diversity
Inletkeeper, partners file lawsuit against Cook Inlet gold mine

The Johnson Tract Mine is located on CIRI-owned lands inside Lake Clark National Park.

A sockeye salmon is carried from the waters of Cook Inlet on North Kenai Beach in Kenai, Alaska, during the first day of the Kenai River personal use dipnet fishery on Thursday, July 10, 2025. (Jake Dye/Peninsula Clarion)
Kenai River dipnet fishery open 24 hours beginning Friday night

Per fish counts available from the department, 471,000 sockeye have been counted so far this year — with 108,000 counted on Wednesday alone.

Attorneys Eric Derleth and Dan Strigle speak to Superior Court Judge Kelly Lawson during the opening arguments of State of Alaska v. Nathan Erfurth at the Kenai Courthouse in Kenai, Alaska, on Wednesday, July 16, 2025. (Jake Dye/Peninsula Clarion)
Opening arguments offered in Erfurth trial

The trial is set to continue for around two weeks, into early August.

Evacuees in Seward, Alaska, walk along Adams Street following a tsunami warning on Wednesday, July 16, 2025. (Photo by Jeff Helminiak/Peninsula Clarion)
Tsunami warning canceled following 7.3 earthquake near Sand Point

An all clear was issued for Kachemak Bay communities at 1:48 p.m. by the Kenai Peninsula Borough Office of Emergency Management.

The Ninilchik River on May 18, 2019, in Ninilchik, Alaska. (Photo by Michael Armstrong/Homer News)
Ninilchik River to remain closed to king salmon fishing

It was an “error in regulation” that would have opened the Ninilchik River to king salmon fishing on Wednesday.

A table used by parties to a case sits empty in Courtroom 4 of the Kenai Courthouse in Kenai, Alaska, on Wednesday, Dec. 11, 2024. (Jake Dye/Peninsula Clarion)
Nikiski woman sentenced to 4 years in prison for 2023 drug death

Lawana Barker was sentenced for her role in the 2023 death of Michael Rodgers.

Alaska State Troopers logo.
Seward resident arrested after Monday night police pursuit

Troopers say she led them on a high-speed chase on Kalifornsky Beach Road for around 7 miles.

Concert-goers listen to The Discopians at Concert on the Lawn on Saturday, July 12, 2025, at Karen Hornaday Park in Homer, Alaska. (Delcenia Cosman/Homer News)
‘Dancing at the end of the world’

KBBI AM 890 hosted their annual Concert on the Lawn Saturday.

Most Read