Alaska may reduce its ability to issue pension obligation bonds in a move lawmakers say would show the state is reducing its risk as it takes on its pension liabilities.
The state legislature passed a bill April 30 that would lower the state’s pension bond authority to $1.5 billion from $5 billion.
The legislation also requires any pension bond proposal to go before a legislative committee 45 days before it is issued.
Gov. Bill Walker has not said whether he will sign the bill, which has been forwarded to him for a decision.
Senator Anna MacKinnon, a Republican who introduced the proposal, described it as a compromise that preserves the state’s ability while increasing fiscal control during an April 19 House Finance Committee meeting.
“It doesn’t tie the hands of the administration,” she said. “It allows them to come and talk to the legislature.”
The 45-day notification period preserves the governor’s ability to capitalize on favorable interest rates, according to a state fiscal analysis.
MacKinnon described it as a “nod’ to credit rating agencies to show the state is not be relying on debt to solve its pension problems while still keeping pension bonds as an option to as one component in address Alaska's unfunded liability.
Her original proposal called for only halving the state’s authority to $2.5 billion but by the time it made its way through the legislature another $1 billion was shaved off.
MacKinnon said the $5 billion cap was put in place when the state had a $10 billion to $12 billion pension liability. With that amount halved, she said it made sense to do the same with the state’s authority.
POBs, in which government issuers sell bonds and put the proceeds into pension funds on the assumption that the pension fund returns will exceed the interest rate on the taxable debt, are controversial because they effectively represent a bet on the markets.
In late 2016, Walker canceled a planned $3.3 billion POB sale after S&P Global Ratings said the bond issue could result in downgrade for the state. He also cited lack of support from the state legislature in not going forward.
Deven Mitchell, Alaska's debt manager, said there’s been no talk at this point about pursuing pension bonds. And if the state does decide to do so in the future and needs to exceed the $1.5 billion cap, it would go before the legislature.
“From a debt management perspective it would be a best practice to have the legislature OK any transaction before pursuing it,” he said.
Tim Little, S&P’s lead analyst for Alaska, called the proposal a “prudent” move but not one that would necessarily affect the state’s ratings. The main issue affecting its status is how it handles its budget and in particular its reliance on the Permanent Fund, a roughly $60 billion pool of oil and gas tax revenues invested through the years.
“I think the state has made incremental progress on fiscal reform since the downturn on oil prices a few years ago,” Little said.
Added S&P analyst Gabriel Petek: “If they reduced the authorization on the margin we view that as a favorable step but on its own it doesn’t change our view on the credit quality.”
Alaska's pension system was 63% funded in fiscal 2016, the most recent year for which comprehensive data were available for all 50 states, according to a Pew Charitable Trusts report on state pension funding that was released in April.
That puts Alaska among 17 states that had less than two-thirds of the assets needed to pay promised benefits, according to Pew.
Alaska is rated AA by both Fitch Ratings and S&P and Aa3 by Moody’s Investors Service.