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Alaska Readies $5 Billion Pension Deal

SAN FRANCISCO - Alaska lawmakers have sent Gov. Sarah Palin a bill authorizing the state government to issue up to $5 billion in pension obligation bonds.

The governor is expected to sign the bill, according to the sponsor, Rep. Mike Hawker, R-Anchorage.

Approval of the bond bill follows passage of an earlier bill, signed Tuesday by Palin, in which the state government committed to pick up a sizable share of the retirement liabilities of local governments and school districts around the state.

The pension obligation bonds would give the state a tool with which to manage those obligations, said Brian Andrews, deputy commissioner of the Department of Revenue.

The unfunded liabilities of the state's Public Employees' Retirement System and Teachers' Retirement System exceed $8 billion.

The bill creates a new Alaska Pension Obligation Bond Corp. to issue the debt, though it also authorizes the Alaska Municipal Bond Bank Authority, Alaska Housing Finance Corp., and the state bond committee to issue POBs.

It is the new Pension Obligation Bond Corp. that will be used to conduct the transaction, according to Andrews, who played a key role in drafting the legislation.

"We still have to go out for a procurement for bond counsel, financial advisers, and investment bankers," he said. "There's a lot of work that needs to be done."

Andrews said August or September are probably the earliest a transaction could be done. "Again, this is all dependent on market conditions," he said.

The goal would be to issue the taxable pension bonds to borrow money long term at a rate at lest 1.5% lower than the 8.25% assumed investment returns of the retirement system, according to a staff report prepared by Andrews for lawmakers.

"With current capital market conditions, pension finance transactions can result in substantial savings to the public treasury, if not more than a billion dollars in the coming years," Hawker said in a statement after the bill cleared the Senate last week. "I thank the Palin administration for their recognition and support of this opportunity to reach a real cos- saving solution to the issue of our unfunded retirement system liabilities."

The retirement funding issue came to a head in 2006, when the retirement systems presented local governments with new contribution calculations charging them between 40% and 54% of payroll.

This week, Palin signed a bill that caps contribution rates at 22% of payroll for Public Employees' Retirement System employers and 12.56% for employers in the Teachers' Retirement System.

The state will make up the difference, at a cost projected to top out at $452 million annually in fiscal year 2010, according to a staff report prepared for lawmakers.

The high price of crude oil has resulted in a surge of money into the state treasury. The resulting surpluses, and a new oil tax system, were factors in Standard & Poor's March decision to upgrade Alaska's general obligation bond rating to AA-plus from AA.

Moody's Investors Service rates the state Aa2, and Fitch Ratings assigns a AA rating to Alaska GOs.

Last week, Palin signed a supplemental budget bill that placed $3.6 billion into Alaska's Constitutional Budget Reserve and Statutory Budget Reserve funds.

By comparison, the governor's entire general fund operating and capital budget proposal for fiscal 2009 called for $4.4 billion in spending, though lawmakers are expected to load the capital budget up massively before their scheduled adjournment Sunday.

If Alaska uses its full authorization, it would be the second-largest POB deal on record, according to Thomson Financial data.

Meantime, Connecticut is in the process of pricing a $2 billion pension offering that would, at least for now, be the fourth largest.

Bear, Stearns & Co. is conducting a week-long retail order period that will close today before next week's institutional pricing. Retail is being offered a $1.6 billion series of current interest bonds maturing from 2014 through 2028, with a term bond in 2032, with yields ranging from 4.20% in 2014 to 5.20% in 2025, all priced at par. There is also a $400 million series of capital appreciation bonds maturing from 2014 to 2025, most of which are not being offered to retail.

The credit is rated Aa3 by Moody's and AA by both Standard & Poor's and Fitch.

 

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