Alaska doubles down on failed public pension gambles

Governor Walker (Alaska's, not Wisconsin's) has until now made some tough decisions and taken some difficult actions to address the state's oil-crash-induced fiscal crisis, many of which have earned my respect for him. In the background of the current fiscal crisis is another longer-term crisis -- the public pension crisis. And what he's planning to do about that risks the state's future.

Alaska's public pension system is the 4th-worst funded in the country. But that's the good news. The bad news is that that 4th-worst status is based on an actuarial assumption of an average of 8% returns per year on fund assets. In other words, only if the state's very optimistic hope for 8% annual returns actually materializes do we get to say with pride that we're the 4th-worst pension in the country. If reality turns out to be less optimistic, our reality will be much worse. Anything less than 8% returns per year and we're in an accelerating downward spiral.

But now the governor and other financial managers at the state are doubling down at the casino. They're about to sell $3.5 billion (about 1/5th of all pension obligations) of 4% bonds and investing the proceeds in stocks. If returns on the plan's investments come in at 6% or 7% per year for the next 23 years, the bond sale move will have made money but what it made will only offset the plan's deterioration as a result of failing to earn its 8% actuarial benchmark. If the average return is 4% for the next 23 years, the bond sale will have no positive effect and the pension fund will have collapsed and either wrecked the state economy or drained the permanent fund. If average returns are less than 4%, the bond sale loses money and the pension fund will collapse.

What have returns been lately? Well last year the return was negative. The 20-year average is 6.7%, and falling. And where are stock markets trading now? Near record highs. So we're going to delve into debt, pay 4% interest on the debt, and use the proceeds to bet on the stock markets when they're trading near record highs.

If it were April 2009, I'd be thrilled with this idea. But it's October 2016. Look where the markets are trading. The risk involved in this is mind-bogglingly off the charts, and it makes me feel physically sick.

And who (under current law) absorbs the risk of this gamble? Not the pensioners, at this point anyway. And it's not the governor or most of the other state finance executives (they'll die, retire to somewhere warm, or score jobs in the banking sector down south by the time this **** hits the fan). No, it's is the ordinary working-age taxpayers who will be crushed by this, if anything other than the most optimistic hope comes to pass.

State's $3.5 billion deal like mortgaging the house to bet on the market

What should be mandated as part of this gamble is this:

100% of any shortfalls created or exacerbated by this maneuver (invested bond proceeds earning less than 4% per year for any period of time over the life of the bonds) is borne entirely by the public pensioners themselves (PERS and TRS tiers 1-3), and them alone. Then I would be willing to let this fly.

No further unfunded liability should be imposed on non-pensioners in this state, whatsoever for any reason.

But that isn't going to happen. They'll keep making bad bets, losing, and imposing the problem they created on the next round of working age taxpayers (who will not benefit from a pension).

Defined benefit pensions are a national mental illness. We need to find a cure.

The lack of public interest in critical decisions regarding long term public liabilities depresses me.


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