02/14/2007 03:42 PM House W&M
| Audio | Topic |
|---|---|
| Start | |
| HB125 | |
| HB13 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
February 14, 2007
3:42 p.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Paul Seaton
Representative Sharon Cissna
Representative Max Gruenberg
MEMBERS ABSENT
Representative Peggy Wilson
COMMITTEE CALENDAR
HOUSE BILL NO. 125
"An Act relating to budget planning and a long-range fiscal plan
for the State of Alaska."
- HEARD AND HELD
HOUSE BILL NO. 13
"An Act relating to prepayments of accrued actuarial liabilities
of government retirement systems; relating to the Alaska
Municipal Bond Bank Authority; permitting the Alaska Municipal
Bond Bank Authority or a subsidiary of the authority to assist
state and municipal governmental employers by issuing bonds,
notes, commercial paper, or other obligations to enable the
governmental employers to prepay all or a portion of the
governmental employers' shares of the unfunded accrued actuarial
liabilities of retirement systems; authorizing a governmental
employer to issue obligations to prepay all or a portion of the
governmental employer's shares of the unfunded accrued actuarial
liabilities of retirement systems and to enter into a lease or
other contractual agreement with a trustee or the Alaska
Municipal Bond Bank Authority or a subsidiary of the authority
in connection with the issuance of obligations for that purpose,
and relating to those obligations; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 125
SHORT TITLE: LONG-RANGE FISCAL PLAN
SPONSOR(s): WAYS & MEANS
02/08/07 (H) READ THE FIRST TIME - REFERRALS
02/08/07 (H) W&M, FIN
02/14/07 (H) W&M AT 3:30 PM HOUSE FINANCE 519
BILL: HB 13
SHORT TITLE: RETIREMENT SYSTEM LIABILITY/BONDS
SPONSOR(s): REPRESENTATIVE(s) HAWKER
01/16/07 (H) PREFILE RELEASED 1/5/07
01/16/07 (H) READ THE FIRST TIME - REFERRALS
01/16/07 (H) W&M, STA, FIN
02/14/07 (H) W&M AT 3:30 PM HOUSE FINANCE 519
WITNESS REGISTER
FRANK J. INGRASSIA, Chairman
Municipal Finance and Infrastructure Group
Goldman, Sachs & Co.
New York, New York
POSITION STATEMENT: During hearing of HB 13, presented
information on pension obligation bonds.
RICHARD A. SCHOBER, JR., Vice-President
Municipal Finance
Goldman, Sachs & Co.
Seattle, Washington
POSITION STATEMENT: During hearing of HB 13, explained portions
of pension fund debt calculations.
CAROL SAMUELS, Vice-President
Seattle-Northwest Securities
Portland, Oregon
POSITION STATEMENT: During hearing of HB 13, presented
information on pension obligation bonds and described Oregon's
experience with pension obligation bonds.
PAUL BLOOM, Director, & Regional Manager
Pacific Northwest Public Finance Group
Merrill Lynch
(No address provided)
POSITION STATEMENT: During hearing of HB 13, presented
information on pension obligation bonds.
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 3:42:43 PM. Present at the call to
order were Representatives Hawker, Gruenberg, Roses, Seaton,
Fairclough, and Cissna.
HB 125-LONG-RANGE FISCAL PLAN
3:43:44 PM
[Contains discussion of HOUSE BILL NO. 68.]
Chair Hawker announced that the first order of business would be
HOUSE BILL NO. 125, "An Act relating to budget planning and a
long-range fiscal plan for the State of Alaska." He stated that
the committee considered amending HB 68, but by consensus agreed
instead to go with a proposed committee substitute.
3:44:42 PM
REPRESENTATIVE FAIRCLOUGH moved to adopt the proposed committee
substitute (CS) for HB 125, Version 25-LS0546\C, Cook, 2/8/07.
There being no objection, Version C was before the committee.
[HB 125 was held over.]
HB 13-RETIREMENT SYSTEM LIABILITY/BONDS
3:45:34 PM
CHAIR HAWKER announced that the next order of business would be
HOUSE BILL NO. 13, "An Act relating to prepayments of accrued
actuarial liabilities of government retirement systems; relating
to the Alaska Municipal Bond Bank Authority; permitting the
Alaska Municipal Bond Bank Authority or a subsidiary of the
authority to assist state and municipal governmental employers
by issuing bonds, notes, commercial paper, or other obligations
to enable the governmental employers to prepay all or a portion
of the governmental employers' shares of the unfunded accrued
actuarial liabilities of retirement systems; authorizing a
governmental employer to issue obligations to prepay all or a
portion of the governmental employer's shares of the unfunded
accrued actuarial liabilities of retirement systems and to enter
into a lease or other contractual agreement with a trustee or
the Alaska Municipal Bond Bank Authority or a subsidiary of the
authority in connection with the issuance of obligations for
that purpose, and relating to those obligations; and providing
for an effective date."
CHAIR HAWKER, sponsor of HB 13, explained that HB 13 empowers
the Alaska Municipal Bond Bank Authority (municipal bond bank)
to utilize its credit enhancement services for political
subdivisions that may wish to structure a pension finance
transaction to help meet the costs of unfunded pension
liabilities. He noted that HB 13 provides the state another
method to resolve the various state employers' unfunded pension
liabilities. Chair Hawker observed that there are various
methods to reduce pension fund debt, such as early payment,
refinancing at a lower cost, or reducing operating costs. The
bill contains concepts that allow the state to refinance its
unfunded pension plan debt at a lower rate of interest.
Although a similar bill, House Bill 278, was considered in last
year's legislative session, HB 13 has been expanded to empower
the executive branch to pursue such transactions that it might
deem appropriate to help resolve the state's obligations under
the Public Employees' Retirement System (PERS) and the Teachers'
Retirement System (TRS). He emphasized that this bill does not
execute, direct, or authorize transactions; rather it empowers
the decision makers to bring forward proposals for transactions
they may deem appropriate. He opined that HB 13 takes a more
innovative and contemporary view of the state's ability to use
structured financing.
3:51:22 PM
FRANK J. INGRASSIA, Chairman, Municipal Finance and
Infrastructure Group, Goldman Sachs & Co., referred to a
PowerPoint presentation titled, "Pension Obligation Bonds -
Overview of Structure and Current Market Opportunities" which
was also provided to the committee. He informed the committee
that since 2000, a number of factors have caused steady growth
in unfunded pension and other post employment benefit costs. He
explained that nationwide, funding ratios for public pension
funds grew from about 80 percent in 1990 to over 100 percent in
2001. Due to the successful economy at the time, many states
negotiated more generous benefit contracts with their employees.
Unfortunately, shortly after that "the bubble burst" and pension
funding ratios started to fall significantly. As a result, by
2005, there was a nationwide pension funding deficit (not
including medical benefits) of over $340 billion. The problem
of unfunded liability has grown exponentially as other costs,
such as medical costs, continue to grow. Unfunded pension fund
liability considered a debt of the state by Standard and Poor's
financial rating service, he said.
3:55:04 PM
MR. INGRASSIA referred to page 2 of the handout and said that in
1999 the funding ratios for PERS/TRS were 106 percent and 103
percent, respectively. Since then the unfunded actuarial
accrued liability (UAAL) has increased dramatically and the
cumulative funding ratio for PERS/TRS combined has decreased
from 67.6 percent in 2004 to 64.1 percent in 2005. The funding
ratio might be even lower if one were to examine the figures
from 2006, he said.
CHAIR HAWKER observed that today's presentation does not require
the most recent data on the PERS/TRS liability; rather the
financing opportunities that are being discussed today apply
regardless of the details of the data.
3:56:33 PM
MR. INGRASSIA explained that an 80 percent funding ratio is the
minimum level required for a pension fund to be self-sustaining
based on the earnings that it generates. If a pension fund has
a ratio below 80 percent, the pension authority should take some
action to fix it; pensions funded at 80 percent or above are
probably in pretty good shape, he opined.
MR. INGRASSIA described the UAAL as the difference between
assets currently in the pension fund and the present value of
the required payments to the existing plan participants over
time. Each year a state's pension system reviews the
assumptions in the pension fund actuarial report to determine
the required payment stream and compare it to the earnings
potential of the assets on hand. The pro-forma annual shortfall
is then discounted at the assumed interest rate, which in Alaska
is 8.25 percent, to determine the present value of the
shortfall. The UAAL is essentially a debt which carries an
interest rate of 8.25 percent. In Alaska, this debt obligation
is constitutionally protected by Article XII, Section 7 of the
Alaska State Constitution, he noted.
MR. INGRASSIA described pension obligation bonds (POBs) as a
method to refinance pension fund debt in order to lower the cost
of the existing debt to plan participants. He observed that
this is an ideal time to look at POBs because interest rates are
at a 30-40 year low, as is shown by the chart on page 4 of the
handout. He said that the state could issue POBs in today's
market at about a 5.56 percent interest rate, which is an
attractive refinancing possibility when compared to the 8.25
percent interest accruing on the UAAL. The potential savings to
the state from refinancing are significant, he noted.
4:00:54 PM
REPRESENTATIVE SEATON observed that an 80 percent funding ratio
leaves 20 percent unfunded, therefore the state is relying on
the interest to pay some percent of the benefits. He questioned
whether the 80 percent target is sufficient to allow for the
state to make the payments it is scheduled to make.
MR. INGRASSIA related that his research in the pension field
indicates that at 80 percent, there is an earnings potential to
get to 100 percent funding. A fund could target a higher
funding ratio, he noted, but at 80 percent the earnings
potential is sufficient to allow the fund to grow to 100
percent. Although a study by the state's actuary, Buck
Consultants, used an 85 percent target for one fund and a 90
percent target for another, the Municipal Finance and
Infrastructure Group used 80 percent to keep the numbers
manageable. It is the state's decision to determine at what
level to fund its pension plans, he noted.
REPRESENTATIVE SEATON asked whether the choice to fund at 80
percent requires the state to make 20 percent more to fund its
future liability.
4:03:24 PM
MR. INGRASSIA said another component to consider is that of
employer contributions, which can also be higher than the
ongoing "run rate" of the requirements. The aforementioned is
what has been happening. The higher employer contribution rates
are much higher than the ongoing run rate to try and make up the
unfunded liability. He indicated that earnings, employer
contributions, and other outside contributions are all taken
into consideration.
4:03:49 PM
REPRESENTATIVE SEATON followed up by clarifying that under the
scenario presented today, the 80 percent funding might require
an employer contribution rate increase to make up the additional
20 percent.
MR. INGRASSIA noted his agreement with Representative Seaton's
clarification, and noted that the state could have a higher
target number than 80 percent.
4:04:31 PM
CHAIR HAWKER said that in planning the presentation, 80 percent
seemed like a good number for discussion purposes and he pointed
out that with market possibilities, funding at 100 percent could
be overaggressive and result in an over-funded program. He
reminded the committee that the determination of what
constitutes full funding and other alternatives, is a policy
call. He said that other alternatives which may be discussed
include making ongoing additional contributions to the pension
funds.
MR. INGRASSIA noted that the 80 percent funding ratio is
considered the minimum funding level. He referred to page 4 of
the committee handout and described as significant the potential
savings to the state in refinancing from 8.25 percent interest
to 5.56 percent interest. For example, the issuance of $2.1
billion in bonds for PERS could result in a savings of $626
million in present value savings, while issuance of $1.3 billion
in bonds could save $384 million in present value savings for
TRS. He clarified that to fund at 80 percent meant funding
enough to get to an 80 percent funding ratio; not funding 80
percent of the unfunded liability.
MR. INGRASSIA emphasized that there are numerous factors to
consider and that all the numbers are based on assumptions.
Factors which affect the size of the UAAL include: actuarial
assumptions such as life expectancy and demographics, assumed
rate of return, actual investment returns, changes in
contractual benefits, and benefit cost assumptions compared to
actual experience. Due to these variables, the size of the UAAL
is constantly shifting, which is one reason to avoid a 100
percent ratio. He identified three possible options for funding
Alaska's UAAL: upfront cash contributions by the state or
employers from any surplus funds, increased employer
contributions, or pre-fund with POB proceeds at 5.56 percent
interest. Pension fund managers can reach their funding goals
by mixing and matching these alternatives, he informed the
committee. He said that due to growth in unfunded liabilities,
a number of states have issued POBs over the last few years.
MR. INGRASSIA informed Representative Gruenberg that Goldman,
Sachs & Co. has done underwriting with the state in the past and
hopes to continue to do business with the state, noting that his
company earns fees as a bond underwriter.
4:10:34 PM
REPRESENTATIVE ROSES expressed concern that the interest rate
available to the state will not be as attractive if too many
states issue these bonds at the same time, thereby flooding the
bond market.
MR. INGRASSIA explained that the assumption is that these
pension bonds will be taxable bonds, and since most bonds are
non-taxable, the market for taxable bonds is almost unlimited.
As an example, the state of Illinois issued $10 billion in
taxable pension bonds in 2003, and the primary buyers were
European banks which would not normally consider buying
municipal debt. There is a saying in the taxable market that
"size opens eyes," meaning big taxable programs are more liquid
and more attractive to big pension funds and banks, he said. He
offered that "we do not really see any constraint in terms of
the market for taxable pension bonds."
4:12:17 PM
MR. INGRASSIA, in response to a question about whether bonds are
always profitable to the issuers, directed the committee's
attention to the table on page 6 of the handout which shows that
some states sold bonds "right as the bubble was bursting" and
were not profitable by 2004. However, if one looks at a time
progression, the bonds generally catch up. As of 2004, 84
percent of POBs were profitable, 7 percent were at a break-even
point, and 9 percent had lost money, he said.
CHAIR HAWKER indicated that risk assessment and examination of
other state's experiences with pension bonds would need to be
considered by the committee prior to moving HB 13.
REPRESENTATIVE GRUENBERG asked whether the state could use the
permanent fund as a funding source instead of selling bonds on
the open market.
4:14:22 PM
CHAIR HAWKER replied that although that concept could not be
considered today, perhaps representatives from the permanent
fund could address this at a future time.
MR. INGRASSIA reminded the committee that an issue to consider
is how the various financial rating agencies view pension
liabilities. He explained that the rating agencies have
slightly different views, but they all tend to view unfunded
liability as a debt of the state. Furthermore, if the debt is
not being solved, it is viewed as a problem. Despite the
different ways that rating agencies view pension fund debt, the
bottom line is that implementation of a plan to address and fund
the existing UAAL and a funding plan for future obligations
could be considered a credit positive.
MR. INGRASSIA said the total annual employer contribution for
pension liabilities has the following two components: the
normal pension contribution amount required to meet the annual
pension expenses and the UAAL component. The UAAL is sized to
help amortize the unfunded liabilities over time. The UAAL has
been receiving a lot of attention in this state, he observed.
To achieve an 80 percent funding ratio, the states' employers
would have to contribute $2.1 billion for PERS and $1.3 billion
for TRS, he said. However, he cautioned that these figure are
based on information from 2005 and would be considerably higher
if today's numbers were used. He told the committee that
although some states have sold bonds to make one year's payment
to their funds, he does not recommend that approach.
4:17:52 PM
MR. INGRASSIA stressed that recognizing and managing risks is
one of the keys to POB issuance success. He said that the broad
range of investments utilized by pension funds generally result
in returns substantially higher than today's debt rates. If the
actual returns are above the assumed actuarial investment
return, the savings from the issuance of pension bonds can be
even higher than predicted. Conversely, earnings of less than
the current 8.25 percent, but more than 5.56 percent of the
bonds would still result in savings, although less than
projected. The issuer only goes negative if the earnings rate
on the pension assets is less than the 5.56 percent predicted,
he said. Pension obligation bonds can help improve relations
with local governments by providing more security and a higher
funding ratio and can permit more stable budget planning for all
pension fund participants.
4:18:55 PM
CHAIR HAWKER advised that in later meetings the pension asset
managers would present information on the state's past track
record for past returns.
MR. INGRASSIA explained that potential risks include negative
returns if the returns are below the bond interest rate.
Furthermore, bond issuance converts "soft" obligations to "hard"
obligations. Last, POBs result in a lump-sum payment to a
pension fund, which concentrates rather than spreads market
risk. There are ways to manage this market risk, he assured the
committee. He clarified that a "soft" obligation is one in
which the debt is owed, but the details of when and how it will
be paid are not set. However, once bonds are sold there is a
fixed amortization schedule, which must be paid in a timely
fashion or default is risked. Therefore, it has a "hard"
schedule.
4:22:02 PM
RICHARD A. SCHOBER, JR., Vice-President, Municipal Finance,
Goldman, Sachs & Co., reminded the committee that for the past
two years there has been an established cap in Alaska [which has
now been repealed] on the annual amount by which employer
pension obligations can increase. As a result, the
contributions have been low. When the actuaries have re-
calculated what is needed to fund the UAAL, the state has seen
gigantic increases in the required employer contribution rate.
Although the state does not have to pay the UAAL right away, it
will have to pay someday and the cost of making the payment in
the future will dramatically increase.
MR. INGRASSIA reminded the committee that since the Alaska State
Constitution limits the issuance of general obligation debt to
capital improvements, state issuance of POBs will require new
legislative authority, including the probability that debt
service payment on POBs will require an annual appropriation.
He summarized that assuming an 80 percent funding ratio, if the
state were to issue $1.3 billion in bonds for the TRS program at
5.56 percent, the total gross savings over 25 years is estimated
to be $720 million, which equates to present value savings of
about $384 million. For the PERS program, issuance of $2.1
billion in bonds would result in a savings of about $1.1
billion, which equates to present value savings of $626 million.
If a higher savings rate is chosen, the savings rate would be
proportionally higher, he noted.
4:26:48 PM
MR. INGRASSIA referred to the matrix on page 12 of the handout
and explained that it provides a reference point by which the
fund managers can mix and match policies to achieve a target
funding ratio of 80 percent by 2032. If no bonds are issued and
no cash contribution is made, the average employer contribution
rate for TRS over the next 10 years would be 44.96 percent. The
matrix shows how the employer contribution rate can change
depending on whether POBs are issued and whether any cash
contributions are made to the UAAL. A 5 percent decrease in the
employer contribution rate equates to an annual savings of $32
million, he said. He suggested this type of payment could be
done over a period of a few years, to ease the effect on the
general fund.
MR. INGRASSIA indicated that the aforementioned calculations
regarding TRS are based on the wage base of both defined-
benefits employees [Tiers 1-3] and defined-contribution
employees [Tier IV].
4:30:44 PM
MR. INGRASSIA emphasized that the matrix scenarios shown on
pages 12-13 of the handout provide a useful, powerful tool for
policymakers to use in considering how to approach pension fund
debt. He told the committee that for the PERS plan, a decrease
of 5 percent in the employer contribution rate equates to an
annual savings of $94.8 million. He noted that Chair Hawker had
requested a review of past earnings using an actual earnings
rate of 8.1 percent, rather than the expected 8.25 percent.
Page 14 of the handout shows the results of that review, and
indicates that the lowered earning rate increases the projected
employer contribution rate by approximately 1 percent annually,
so the employer contribution rate is not as sensitive to
earnings rates as one might think, he said.
4:32:37 PM
MR. INGRASSIA posed the possibility that the state could
consider ways to optimize use of available cash. For example,
capital construction needs are typically funded from ongoing
revenues, and it may be possible to finance the state's capital
construction requirements with tax-exempt bonds, and use general
fund revenues to contribute to the UAAL. The examples on page
17 of the handout show the predicted results using different
funding options. This may be a way to achieve the desired
policy goals of funding capital needs and reducing the UAAL by
issuance of tax-exempt bonds, which have a lower interest rate,
and therefore may be less of a burden on the state general fund.
CHAIR HAWKER observed that the scenarios shown on the matrix
could assist the policymakers to look at the state's finances in
a more contemporary manner than has been done in the past.
REPRESENTATIVE ROSES expressed concern that if a lot of states
issue tax-exempt bonds at the same time, it could have a
negative effect on the bond market, and thus on the expected
rate of return.
4:36:23 PM
MR. INGRASSIA agreed that there could be a marginal impact on
the bond markets if many states issued tax-exempt bonds at the
same time. However, he reminded the committee, very few states
have the magnitude of cash available for capital expenditures
that Alaska has, so their ability to access the tax-exempt
market would be limited. The possibility mentioned by
Representative Roses does in theory exist, but Mr. Ingrassia
stated he does not think it would be a realistic problem for
Alaska.
CHAIR HAWKER reminded the committee that there are many
resources available to the committee on this complex subject and
that he can provide direct contact information for the committee
members.
REPRESENTATIVE SEATON observed that it would be a policy change
to target funding the pension plans at 80 percent, since past
policy has been to target funding at 100 percent.
CHAIR HAWKER said that consideration of a target funding ratio
for the pension fund liabilities would be an excellent topic to
discuss with the Department of Revenue.
4:39:02 PM
CAROL SAMUELS, Vice-President, Seattle-Northwest Securities,
told the committee that the pension benefits situation in Oregon
was very similar to Alaska's situation. She provided the
committee with copies of a PowerPoint presentation titled,
"Pension Obligation Bonds, The Oregon Story," dated February 14,
2007. Referring to the page titled, "Oregon vs. Alaska Pension
System," she described the Oregon pension system as about four
times the size of Alaska's, with an asset base of about $53
billion. It is a single system with multiple tiers and covers
around 325,000 employees. The current post-reform average
employer contribution rate is 15 percent, compared to a pre-
reform employer contribution rate of around 30 percent. The
current funded ratio is about 91 percent, and the unfunded
liability as of December 31, 2005, is $4.6 billion, down from a
high of $17 billion prior to 2003.
4:43:59 PM
MS. SAMUELS described bonding as a popular tool across the
country for financing pension fund liabilities. In Oregon,
local governments and school districts have statutory authority
to issue debt separately for what are termed "full faith and
credit obligations." In general, the issuance authority is more
flexible in Oregon than in Alaska, and does not require yearly
appropriation, she noted. Smaller entities could use "intercept
agreements" with the state to secure the pledge of additional
operating funds so as to achieve a "state" credit rating. In
2003, the Oregon voters approved a constitutional amendment
authorizing the state itself to issue general obligation bonds,
she said. She informed the committee that if Alaska wanted to
take a similar route and enact constitutional and/or statutory
reforms to allow it to issue bonds, it could bring the available
interest rate down further because "that is considered to be the
safest form of security out there." She cautioned that if bonds
are sold, it is critical to consider "housekeeping" issues
carefully to assure that the participating employers receive the
credit due them.
MS. SAMUELS stated that HB 13 incorporates many of the
provisions Oregon found useful, such as intercept agreements and
lump-sum accounts. In Oregon, over 175 employers have issued
approximately $5.4 billion in POBs. Using an 8 percent expected
rate of return, the savings are estimated to be around $1.3
billion. However, the actual returns have been substantially
higher than the projected 8 percent she said, referring to the
chart titled, "Recent Returns - Lump Sum Accounts." These
returns, which reflect the True Interest Cost (TIC), support the
prior observation that size matters and larger issuances receive
more favorable interest rates. Ms. Samuels emphasized that
timing is really key, and that bond issuance transactions should
not be considered a guaranteed savings, although Oregon has had
a positive experience thus far.
MS. SAMUELS pointed out that it is important not to over promise
results, and for people to understand there is no guarantee of
savings and that unfunded liabilities can continue to fluctuate.
Furthermore, she emphasized that accounting and crediting
decisions should be worked out as carefully as possible in
advance of any bond issuance.
4:52:07 PM
MS. SAMUELS acknowledged that the funding scenarios on the
handout page titled, "Oregon vs. Alaska: Potential Savings," is
based on an assumed bond interest rate of 6 percent and the
assumption that the entire unfunded liability is funded. These
numbers are chosen for the sake of illustration, and she said
her firm would likely not recommend funding the entire unfunded
liability.
CHAIR HAWKER reminded the committee that there is no transaction
on the table nor is any commitment to any firm being made at
this point. The investment banking community is providing
information for further consideration of these issues by the
committee, he said.
4:55:42 PM
PAUL BLOOM, Director & Regional Manager, Pacific Northwest
Public Finance Group, Merrill Lynch, told the committee his firm
has been very involved in state public finance matters and
helped draft and analyze last year's House Bill 278. He noted
that it may be in the state's best interest to have the option
to issue POBs as part of its "tool kit" to address pension
funding challenges. Today's low interest rates make this a
particularly attractive option at this time, he said. Depending
on the funding ratio scenario chosen, Alaska could potentially
capture hundreds of millions of dollars in present value
savings. He opined that it is critical to understand that POBs
are only one of a number of tools that could be used to address
the pension fund liability issues. There are a number of
factors to consider when addressing this issue. He suggested
that a proactive approach to asset management includes
exploration of ways to protect the state's investment returns
from changes in inflation and downturns in the equity market.
He offered that the passage of HB 13 would be a positive step
for Alaska to take.
REPRESENTATIVE SEATON asked how current equity market
performance affects risks in the bond market.
5:02:28 PM
MR. BLOOM replied that is why his firm recommends being
proactive in looking at ways to protect investments against
market downturns, noting that there are things an investor can
do to protect itself from changes in the equity market. He said
that the returns in the fixed income market are not generally as
high as those in the equity markets, but that fixed income
investments may help stabilize the funding ratio of the state's
pension funds. Some employers may be willing to have a higher
employer contribution rate if it would result in a more
predictable and stable system, he said. He noted that the
current allocation of assets in Alaska's system is about 60-70
percent in equities. In general a mix of 75 percent in equity
and 25 percent in fixed income is a fairly common asset mix for
pension systems. There are adjustments that can be made to an
asset mix to help protect it and lock in gains, he advised.
CHAIR HAWKER said that future consideration of HB 13 would
likely include discussions with the state's asset managers about
the pension fund portfolio past performance and possible future
direction.
[HB 13 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
5:08:18 PM.
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