My turn: Retirement debt gamble is no pay day

Posted: Wednesday, April 09, 2008

The Alaska Legislature has authorized the "big bet" to supposedly cope with retirement costs. The idea: Borrow money based on the projected unfunded liability, not yet due, and invest it in the stock and other markets; hopefully make some money.

This form of legalized gambling will not relieve the state of the unfunded liability. In fact, it can make it greater, and can directly interfere with other large statewide financing needs. The credit market mess of the past year should be a cautionary tale.

However, it will provide huge fees to bond lawyers, financial advisers and consultants, agencies, underwriters, Wall Street and political contributors. It can also help with finding very lucrative future employment.

Follow the money, connect the dots.

The result: large privatized fees, with the state retaining the real risk. The state already has the responsibility for the unfunded liability no matter whether the bonds are sold, or not.

Plan member benefits, on the other hand, are also already protected from the unfunded liability because of the state's contingent liability through the Alaska Permanent Fund, the Constitutional Budget Reserve Fund, and whatever other resources the state has. No state can shield itself from debt created under the Alaska retirement system's design configuration and implementation under U.S. and Alaska law. I have little doubt the attorney general's office might argue otherwise; but that would be more political banter. Simply put, when you have more than $40 billion of state assets lying around, an unfunded potential liability is already well taken care of; even if not directly committed.

Essentially, the Permanent Fund and other funds are already doing the arbitrage through their investing. Those funds should not be put at greater risk. However, that doesn't create the fees for the phalanx of bond consultants, dealers, and contributors.

The state could never afford to default on this deal or the unfunded liability, and it would have to make up any additional amounts if the funds go south. The state gets a high rating because the rating agencies know that the Permanent Fund and other funds, in reality, even if not obligated directly, are an available potential asset. That's the way the world of finance really works, no matter what the lawyers say.

Why further absorb so much bonding capacity with the Alaska gas line and other needs in the near future? If the state's going to take a risk, why not use it on something truly important that will actually generate solid returns to pay the future unfunded liability and help the rest of Alaska - rather than an arbitrage play.

For the past several years the hysteria of the unfunded liability has been strategically used to make changes that have not proven to create a better system. Those changes will not lower the liability to any appreciable extent, and now the Legislature has essentially let the other government employers off the hook - solidifying the liability in the State. We could have done that three years ago and dispensed with this nonsense.

Hopefully the current crop of Alaska finance experts take a statewide enterprise view toward this "bet." It will be interesting to check the list of beneficiaries when the bonds are sold (we're not talking about the plan members). However, the chance for a big fee payday may be too good to pass up.

The best interests of the state as a whole is what counts. With so many assets at risk, and so many large capital needs - the gas line, the permanent fund, a potential use of large block funding to bring renewable low cost energy to the Railbelt with a reinvigorated Susitna Dam Project - why gamble away the flexibility and debt capacity with an arbitrage play on the retirement systems? Where the state essentially takes all the real risk anyway.

The state of Alaska desperately needs a much wider financial vision. Unfortunately, history has shown that much sovereign wealth has been dissipated through the lack of such global or enterprise thinking. Alaska has done it before.

Follow the money, connect the dots.

• Anselm Staack is a certified public accountant and an attorney, who teaches accounting and private and public financial management subjects for the University of Alaska Southeast. These views are his own.

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