Alaska Officials Consider Pension Obligation Bonds

Alaska Gov. Bill Walker is considering issuing pension obligation bonds to help pay for future pension contributions, and state Revenue Commissioner Randy Hoffbeck is reportedly studying the strategy.

State lawmakers have already shown a desire to reduce pension costs now by shifting costs to the future; they passed legislation recently to lower the state’s annual pension contributions, which often crept upwards of $1 billion.

The revenue from the pension obligation bonds would be used to make annual pension contributions and reduce the burden of pension costs on the state budget. But as always, the bonds come with risk.

From the Alaska Dispatch:

Gov. Bill Walker is wondering if pension borrowing may be useful in Alaska.

If the state can borrow money at 5 percent interest, and earn an expected 8 percent on the invested money, the difference could bolster state retirement savings.

Borrowing money at a low rate and investing it to earn a higher rate is known as arbitrage, but it comes with risks, Michael O’Leary, a retired state investment adviser, has told the Alaska Retirement Management Board, which oversees the trust funds as it was reviewing such investments.

“There are no free lunches,” O’Leary told the board.

Further, if Alaska or any other government entity uses pension obligation bonds to make annual payments that would have otherwise been made from general funds, it can simply dig itself into a deeper financial hole than it would otherwise have.

While Walker has the authority on his own to issue up to $5 billion of such bonds, Revenue Commissioner Randy Hoffbeck said he would not do so without approval of the Alaska Legislature. He did not say what form that approval might take.

[…]

Fitch Ratings, one of the major bond rating firms, has recently warned of the growing use of pension obligation bonds nationally and the impact on state bond ratings.

“Issuing POBs always exposes the issuer to timing and investment risks to which it otherwise would not be exposed,” Fitch said in August.

The success of POBs hinges on investment returns outweighing the interest rate on the bonds.

According to Fitch, pension bond issuances in the first half of 2015 have already doubled issuances in all of 2014.

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