Alaska Advances POB Plan

PHOENIX - Alaska has authorized up to $3.5 billion of pension obligation bonds it hopes to sell in late October, in the face of some questions about the state's willingness to appropriate the money it owes.

The state's Pension Obligation Bond Corporation approved up to $3.5 billion of bonds at a meeting in Juneau Monday to replace current actuarially predicted cash flows with debt service cash flows, reducing the state's obligation for payment on behalf of municipalities to the retirement systems.

But a recent dustup between the state legislature and the manager of a building lawmakers were using in Anchorage raised some concerns about the willingness of lawmakers to pay money the state owes.

The Legislative Affairs Agency notified the building management by letter in July that it would be vacating the building in October because the legislature had not appropriated enough money to pay the remainder of the controversially expensive lease, which exceeded $3 million annually.

In March a judge had determined that the lease was illegal because it did not conform to the requirements of the procurement code. Ultimately the legislature determined to partially fund the fiscal year 2017 lease payment, purchase an alternate building, and vacate the current building.

The legislature's willingness to break the lease using the "subject to appropriation clause" didn't sit well with one observer who noted that the same "subject to appropriation" pledge backs much of the state's debt.

"When raising capital, 'subject to appropriation' agreements are a fairly common form of public commitments," said a municipal finance expert with knowledge of the situation. "However, once that provision has been employed – especially for the convenience of a legislative body changing its position to avoid payment – the distressing message should be received loud and crystal clear that moral obligations are inevitably subject to change as the future unfolds."

Alaska debt manager Deven Mitchell said that the "subject to appropriation" pledge backing Alaska POBs and much of its other types of debt is legally distinct from the pledge used to enter into operating leases, even though the language is the same on its face. Even though the optics of such a move are not good, Mitchell said, it is up to building owners to protect themselves in such situations.

"I feel like it's bad business for a state entity to do that," Mitchell said, "but it's something that's allowed under the lease.

"I personally was recommending against that," he added, noting that building management provided what they were contractually obligated to provide.

Mitchell said lawmakers meeting the last week of September did not raise any objection to issuing POBs, taxable securities that the Government Finance Officers Association recommends against issuing because of their complexity and the possibility that their invested proceeds could end up earning less than their interest rates.

The state plans on entering into a three-week marketing period, Mitchell said, aiming to price the bonds in the closing days of October.

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Alaska
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