July 9 (Bloomberg) -- Alaska, like local governments across the U.S., is grappling with the pension costs of its retired workers. Unlike other states, Alaska opened its purse and paid a quarter of the bill in cash.
Moving to preserve the state’s top credit ratings, Republican Governor Sean Parnell signed legislation last month that takes the unprecedented step of tapping Alaska’s budget-reserve account to pay unfunded pension liabilities. It will pull $3 billion from the pool to reduce a $12 billion gap.
Home to the nation’s third-largest onshore oil reserve, Alaska gets 90 percent of its operating budget from crude-production taxes and royalties. It’s been saving oil proceeds for decades for when the wells run dry. Alaska is just one of nine states with top scores from Moody’s Investors Service and Standard & Poor’s, and it’s seen how pension deficits have hurt the credit standing of states such as New Jersey and Illinois.
“A year ago when I went to New York City and spoke with the rating agencies to make sure that we maintained our AAA financial credit rating on our bonds, they identified our unfunded pension liability as the single biggest risk,” Parnell said during a signing of the bill June 23 in Juneau.
Five years after the 18-month recession ended, U.S. municipalities still face pension deficits fueled by investment losses during the financial crisis. Some officials also chose to forgo retirement allocations as revenue shrank. State and local pension funds had $1.3 trillion in unfunded liabilities as of the first quarter, according to Federal Reserve data.
Even with the flow of oil cash, Alaska had the seventh-lowest pension-funding level among U.S. states as of 2012, with 59.2 percent of assets needed to cover promised benefits, according to data compiled by Bloomberg. Illinois was the worst, with 40.4 percent. The median was 69 percent.
Alaska, which gained statehood in 1959, trails Texas and North Dakota in terms of onshore reserves. It has two major pots of money used to share oil wealth with its 735,000 residents.
One is the $52.7 billion Alaska Permanent Fund, created in 1976 as the trans-Alaska pipeline neared completion. The pool was established to accumulate and invest oil-tax and royalty money in case the state runs out of crude and to give residents annual dividends. The payout was $900 in 2013 for every man, woman and child who met the residence requirement.
The second fund, the $12.7 billion Constitutional Budget Reserve, was created in 1990 as a rainy-day fund. Initially seeded with settlements from tax and royalty disputes with oil companies, the reserve plugs budget holes in years when oil prices drop and is supposed to be replenished in surplus years.
“Having an oil trust fund like that is unique,” said Keith Brainard, research director for the Lexington, Kentucky-based National Association of State Retirement Administrators. “I am not aware of a state that has dipped into reserve like this, at least in a substantial way like this, to pay down an unfunded liability.”
S&P raised the state to AAA in January 2012, citing safeguards in Alaska’s budget to protect from the volatility of oil-related revenue. The state prefunds about a fifth of its operating budget and pays cash for capital projects. It won Moody’s highest grade in 2010. It has taken other steps to curb pension costs, including shifting new workers to a 401(k)-style plan.
Alaska’s budget reserves are funded by dedicated revenue and can grow even when lawmakers spend out of the pot, said Gabe Petek, an analyst at S&P in San Francisco.
“This is part of what makes Alaska unique,” Petek said. “They have such large investment earnings that even when the state spends a portion of its reserves in a given year, the ending balance can still grow because investment earnings are greater than what was spent.”
Alaska has $861 million of debt, according to data compiled by Bloomberg as of June 30. That’s about 1 percent of California’s $86.5 billion.
The most-traded Alaska general obligations of the past week mature in August 2021. They changed hands July 3 at an average yield of 1.77 percent, or 0.12 percentage point less than benchmark munis, data compiled by Bloomberg show. That signals investors perceive the state to be worthy of its top credit grades.
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