- Debt would be used to help fund teacher's pension system
- Expanded amount would cover public employee retirement trust
Alaska wants to increase the size of its potential 2016 pension obligation bond to $2.6 billion, a billion dollar jump from earlier proposals.
In November, Governor Bill Walker announced plans to explore the possibility of a $1.6 billion pension obligation bond to help fund the teacher’s pension system, dusting off a plan from 2008 that was ultimately scrapped. In the final weeks of 2015, Walker increased that figure to $2.6 billion, expanding the scope of the funds to involve the state’s public employee retirement trust as well as the teacher’s pension system, said Deven Mitchell, the state’s debt manager at the Alaska Department of Revenue.
"As the state was going through its budget development process, which hasn’t been easy, this came up," Mitchell said. "We need the savings, especially in upcoming years, so we figured we’d give it a try."
The oil-price tumble has caused a budget crunch in Alaska, forcing the state to wean itself off of once-plentiful crude oil-related tax revenues, Mitchell said. The loss has caused a mid-year budget shortfall for fiscal year 2016, which ends June 30. Mitchell predicted that just a third of the state’s expected $5.2 billion revenue will be collected.
Alaska had its credit rating cut on Tuesday to AA+ from AAA by Standard & Poor’s, which cited the persistently low oil prices for leaving the state with the growing gap in its budget. The credit rater’s outlook remains negative, signaling future cuts if lawmakers don’t pass measures to curb the budget deficit during this year’s legislative session, according to a report. Moody’s Investors Service continues to rate Alaska Aaa.
The pension obligation bond is part of a multi-step process to repair the state’s budget, including a potential personal income tax, something the state hasn’t seen in 35 years, Mitchell said. Even the state’s famous oil dividend checks to residents are being questioned, Mitchell said.
The state’s pension system was in bad shape long before oil prices fell. As of 2013, Alaska had the fourth-worst funded pension among U.S. states, reporting it had 52.3 percent of the money needed to pay retirees, better than only Illinois, Connecticut and Kentucky, data compiled by Bloomberg shows.
If Alaska goes ahead with the bond, the debt service would be an appropriation of the state, Mitchell said. Because that opens up the bond to non-payment risk, Governor Walker plans to ask for approval when the state legislature reconvenes in the third week of January even though the approval granted in 2008 is still valid, Mitchell said.