Alaska lawmakers took a skeptical look Thursday at a plan by the administration of Gov. Bill Walker to nibble at Alaska’s pension debt.
One week ago, the three-member Pension Obligation Bond Corporation Board voted to borrow up to $3.5 billion from bond markets from Asia. Proceeds from that bond sale would be invested in global markets, and any difference between the interest earnings and the interest paid on the bonds would go toward the state’s unfunded pension debt.
The board is assuming 8 percent average earnings, deputy commissioner of revenue Jerry Burnett told the Senate Finance Committee on Thursday afternoon.
It expects to be able to borrow money from Asian pension funds at 4 percent interest.
“It’s a gamble,” Sen. Mike Dunleavy, R-Wasilla, declared.
“It’s a gamble to have an unfunded pension system and assume we’ll have enough” money when payments come due, Burnett responded.
Until relatively recently, the state offered generous pension and retiree health-care plans to state employees. Mistakes by the firm hired to conduct actuarial analysis for the state led officials to deposit much less money into the retirement trust than was actually needed to meet demand.
Now, the state faces a gap of approximately $6 billion, invested at about 8 percent interest per year, to meet expected demand. The proposal approved by the bond corporation board would carve less than a third off the gap.
If the new money earns 7 percent interest instead of 8 percent, it would close the gap by only $1.1 billion, according to state figures.
Several analyses presented Thursday, including one by the independent reporting firm ProPublica, have found pension obligation bonds a risky option.
The nonpartisan Government Finance Officers Association also opposes pension obligation bonds, calling them “complex instruments that carry considerable risk.”
While lawmakers also appeared skeptical, their ability to stop the plan seems limited. The bond corporation board was empowered by a 2008 law and has the authority to issue up to $5 billion in bonds without approaching the Legislature again.
As planned, the bonds will be marketed through October and sold in the final week of the month, with deals closing on Halloween.