The State of Alaska is continuing the process to sell up to $3.3 billion in pension obligation bonds after receiving mixed reviews from the major credit rating agencies.<\/p>\n
On Oct. 7, S&P Global Ratings placed the state on CreditWatch with negative implications and rated the state\u2019s appropriation-backed bonds, such as the pension bonds, as AA-.<\/p>\n
The agency indicated in a brief that it would likely lower the state\u2019s general obligation credit rating from AA+ to AA if the bonds were sold.<\/p>\n
Appropriation-contingent bonds are often rated at least one notch lower than general obligation debt because of the need for the state Legislature to annually fund their payment.<\/p>\n
\u201cThe CreditWatch action reflects our view that Alaska\u2019s credit profile would incrementally weaken following the issuance of the proposed $3.3 billion (in) pension obligation bonds,\u201d S&P analyst Gabriel Petek said in a release.<\/p>\n
Moody\u2019s Investors Service rated the bonds at Aa3, a rating equivalent to AA-, also on Oct. 7. Fitch ratings gave the potential bond sale an AA rating. Fitch and Moody\u2019s did not indicate they would lower the state\u2019s general obligation rating if the bonds are sold.<\/p>\n
Revenue Commissioner Randy Hoffbeck described the prospective bond sale as a \u201ctrigger\u201d that would just move up the timing of a potential downgrade.<\/p>\n
S&P removed Alaska from its CreditWatch list in August after Gov. Bill Walker vetoed nearly $1.3 billion from the state\u2019s operating budget in an effort to reconcile a $3.2 billion budget deficit.<\/p>\n
At the time, S&P said it would probably be forced to lower the state\u2019s credit ratings if a long-term budget solution is not reached during the 2017 legislative session.<\/p>\n
State Revenue officials are looking to sell between $2.3 billion and $3.3 billion in bonds to help fund the state\u2019s $24.5 billion Public Employee and Teachers\u2019 Retirement systems, which are currently underfunded by about $6 billion.<\/p>\n
Department leaders have said the global market\u2019s appetite for the bonds would ultimately determine the size of the sale.<\/p>\n
They are actively marketing the bonds in Asia, Europe and domestically this month with the hope of attracting upwards of $8 billion in potential buyers to drive down the interest rate on the bonds.<\/p>\n
Hoffbeck said the agency opinions are slightly better than the state was expecting, so the Revenue Department will continue moving forward with the sale. The bonds are expected to be priced on Oct. 26.<\/p>\n
\u201cWe actually thought we were going to be AA- across the board, so we actually ended up on the bonds with a little better rating than we thought we were going to end up with,\u201d Hoffbeck said.<\/p>\n
\u201cIf we can bring in the sale under 4 percent, then we\u2019ll take it all back to the governor and say, \u2018Here\u2019s the risk, we\u2019ve got S&P saying they\u2019re going to downgrade us. Here\u2019s the benefits,\u2019 and let the governor give it a thumbs up or a thumbs down.\u201d<\/p>\n
The deal could potentially help the state take advantage of low interest rates if investment returns on the bond revenue exceed the interest rate they are sold.<\/p>\n
According to Hoffbeck, the state likely won\u2019t sell the bonds if the interest rate on them exceeds 4 percent, while the state\u2019s retirement fund investors aim for 8 percent long-term returns.<\/p>\n
Total debt service on $3.3 billion in pension bonds over 23 years at 3.8 percent interest would be just more than $5 billion. The state\u2019s scheduled assistance payments total more than $8 billion over that time without the bonds.<\/p>\n
The savings to the state on a $3.3 billion sale would total nearly $3 billion, an average $130.2 million per year on its assistance payments to the retirement funds if the 8 percent long-term return target is met. A 7 percent return would net $1.8 billion, or an average savings of $78.2 million per year.<\/p>\n
The 2017 fiscal year retirement assistance payment was $215.8 million. That annual payment is projected to grow to more than $860 million by 2039, which marks the expected end of the closed defined benefit retirement systems and the coinciding maturity of the bonds, according to a Revenue presentation to the Senate Finance Committee.<\/p>\n
Legislators briefed on the proposal have exuded skepticism, noting market uncertainties and states and large cities that have sold pension bonds only to see their situations worsen years later.<\/p>\n
Hoffbeck and Deputy Revenue Commissioner Jerry Burnett are quick to point out problems with pension bonds in other states often arise from trying to capture the savings up front, resulting in back-loaded principal payments. Alaska\u2019s plan calls for principal payments to peak at about $220 million in the last years of the bond terms.<\/p>\n
Additionally, states such as Illinois, Michigan and California \u2014 less than stellar financial performers \u2014 have sold bonds from a worse starting position than Alaska, making for less friendly deal terms.<\/p>\n
Also, the bonds would only be sold with a fixed interest rate, the Revenue Department has stressed.<\/p>\n
State debt manager Deven Mitchell, a nonpolitical Revenue official, has acknowledged the inherent risk in banking on an investment return, but also said the state has structured the deal as conservatively as possible.<\/p>\n
According to the department, the rolling 20-year investment return average for the retirement funds has been between 6.7 percent and 8 percent since 2009, a period that includes both the 2001 and 2008 financial market contractions.<\/p>\n
Achieving just a 4 percent investment return, or one equal to the interest on the bonds, would make the deal a wash. <\/p>\n
In testimony to Senate Finance in September, Hoffbeck said the amount of money the state would lose on the bonds with a sub-4 percent return would be considered \u201ca rounding error\u201d compared to the larger problem the state would have with the overall retirement system because the bond revenue would be invested alongside the $24.5 billion currently in the funds.<\/p>\n
<\/p>\n
Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" The State of Alaska is continuing the process to sell up to $3.3 billion in pension obligation bonds after receiving mixed reviews from the major credit rating agencies. On Oct. […]<\/p>\n","protected":false},"author":83,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[4],"tags":[216],"class_list":["post-22383","post","type-post","status-publish","format-standard","hentry","category-news","tag-state-government"],"yoast_head":"\n