A state committee made up of members of Gov. Bill Walker's administration on Monday approved borrowing as much as $3.5 billion to cover Alaska's pension shortfall.
The three-member committee — deputy commissioners from the state commerce, administration and revenue departments — voted Monday afternoon to authorize the issuing of financial instruments called pension obligation bonds.
The bonds haven't been issued yet and aren't expected to be sold until the last week of October. Members of Walker's administration traveled to New York City last week for meetings about the bonds with ratings agencies and financial firms.
Two Walker administration officials, including Deputy Commerce Commissioner Fred Parady, said at Monday's meeting that interest rates are so low that it would be fiscally irresponsible not to consider issuing the bonds.
The transaction is designed to save the state money on pension payments because the state assumes the borrowed cash will be invested and increase in value by 8 percent annually — while the interest payments on the borrowed cash are expected to be less than 4 percent.
If the state's projections hold, the transaction could net $1.76 billion, according to an analysis presented at Monday's meeting — though that benefit drops to $1.1 billion if the state's investment returns are 7 percent instead of 8 percent.
The analysis didn't include any scenarios in which the state's investments earn less than 7 percent.
But Alaska's two pension systems — one for teachers and one for other public employees — lost about 0.4 percent of their value in the last financial year, which ended in June. The funds grew an average of 6.9 percent annually over the last three years, and 9.3 percent over each of the last seven years.
Walker's administration has the ability to issue the pension obligation bonds without approval from lawmakers based on a 2008 bill passed by the Legislature.
Lawmakers have been skeptical of the plan, however, and the Senate Finance Committee has scheduled a hearing Thursday on the Walker administration's proposal.