Pension obligation bonds touted in committee

Posted: Wednesday, January 18, 2006

Alaska lawmakers looking for ways to pay for the state's underfunded pension plans heard a sales pitch for pension obligation bonds Tuesday.

The House State Affairs Committee is considering the measure that would authorize the Alaska Municipal Bond Bank Authority to issue pension obligation bonds to address the state's nearly $6 billion shortfall in its pension funds.

Alaska, like other states and municipalities across the country, is facing a shortfall due largely to fluctuations in the stock market, rising health care costs, more people retiring earlier and living longer and missed estimates on investment returns.

A Seattle consultant, Carol Samuels of Seattle-Northwest Securities Corp., touted bonds to reduce the shortfall but warned they weren't without risks.

Samuels said by investing the proceeds from the sale of pension obligation bonds at a better interest rate than that of the cost to pay off the bonds, the state could use the difference to reduce the cost of meeting unfunded pension liabilities.

But financial success depends on market return.

The system - used by several states including Illinois and Oregon - is risky if markets take a long-term dive, she said.

"Could this turn out badly? You bet," she said, "But it could also turn out badly if you don't because it could turn out to be the only way you had to take care of the problem."

Tom Boutin, deputy commissioner of the state Department of Revenue, said the department does not endorse the bonds because they depend on market timing for success.

"If your timing is correct, you're a hero. If not, you're a goat," he said, "Institutional investors typically plan for the long term and are not market timers, yet that is a feature that's impossible to avoid."

The committee took no immediate action on the bill and could consider it again later this week.

The discussion continues last session's contentious debate over how best to end the growing shortfall and cover losses.

Last spring, lawmakers agreed to switch the state's pension retirement systems to privatized 401(k)-type accounts for teachers and state employees who start next July. The measure was characterized as a "first step."

Three other bills from the House Ways and Means Committee introduced Tuesday would set up a retirement benefit liability account using the annual dividends from the Alaska Housing Finance Corp., income from the Amerada Hess oil settlement account and a $438 million appropriation from the state's general fund.

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