Berkowitz budget puts Muni property up for collateral



The budget proposed by Anchorage Mayor Ethan Berkowitz has a sleeping giant in it — a plan to incur over $68 million in debt in order to pay another debt. The details were revealed at the Tuesday night Municipal Assembly meeting.

As the municipality heads into 2018, Berkowitz has proposed an overall budget of $519 million — the largest in Anchorage history, and the second year in a row the municpality will have pierced the $500 million mark.

Instead of trimming spending, Berkowitz plans to borrow more than $68 million to pay back an amount that is owed by the municipality to the Police and Fire Retirement System. He plans to put city properties up as collateral.

The city is obligated by settlement to pay $10.3 million a year until the pension fund is made whole. The obligation totals $68.6 million.

The budget avoids the $10 million annual obligation to the pension system by borrowing $68 million and paying it in one lump sum, and then paying back the loan over a longer period of time.  In the past years, the $10.3 million minimum payment was included in the operating budget.

Think of refinancing your home loan from a 10-year to a 30-year mortgage. Or paying off one credit card with another one. It’s a similar concept.

The lump payment must be agreed to by the pension board that oversees the fund.

“This ordinance would essentially allow the Municipality to forward-fund several years of contributions by making a lump-sum payment into the System of approximately $68.1 million. That amount would be treated as a ‘credit’ against the Municipality’s annual payment obligation. Following the financing, the Municipality’s payments to the System for at least the next six years would be eliminated,” the proposed ordinance reads.

The financial effect is that borrowing the money and paying off the obligation would reduce the city’s payment flow from $10 million a year for six years, but  would require paying $6.4 million for decades into the future — all the way to 2033, long after Berkowitz is out of office.  And, it would result in millions of dollars in interest costs that are not currently incurred by simply making the minimum annual payment.

The budget trick makes sense for a mayor going into an election cycle. Berkowitz, up for reelection in April, has had a tough year with soaring crime, unkept promises regarding public safety, and excess property taxes that were promised to be returned to taxpayers but were spent instead. And then, his administration and the liberal Anchorage Assembly raised property taxes by another 5.4 percent.

Now comes more borrowing.

“Did you look at the title?” asked Assembly member Amy Demboski of Eagle River. “It looks like a land lease. But it’s really putting city property up for collateral instead of trimming the budget. This allows them to hide $10 million in pension obligation debt that is normally included in the budget. It’s what we call cooking the books.”

Whatever you call it, it’s a way to push off payments into the future so that Berkowitz can have the size of government he wants going into the April 3 election.

Candidate for mayor Rebecca Logan raised an eyebrow when she learned of the Berkowitz borrowing plan: “In the explanation of the ordinance it says it ‘may be of benefit’ in the long run. It really downplays the risk. This is why the Senate would not go along with the governor’s obligation bond last year.

“But the underlying problem is we’re taking on debt to pay down debt. And we’re growing government.” – Rebecca Logan

Last October, Gov. Bill Walker attempted to borrow up to $3.5 billion to cover Alaska’s pension shortfall, but after running into opposition from the Republican Senate, he dropped the plan. The state was already sinking rapidly in its standing with major credit ratings agencies such as Moody’s and Standard and Poor.


  1. Extending the maturity on a financial obligation is often a first sign of financial distress. It is always a strong indicator of fiscal mismanagement, but it is a way for an elected official to pass an obligation on to a successor.

    Transactions costs for an artifice having no real public purpose while increasing long-term lender risk can be inordinately high. A material portion of the true issuance costs will be hidden but an all-in accounting could approach $2 million for a $68 million deal.

    This financial device may be especially worrisome when used by public issuers in Alaska right now. State aggregate consumption remains at levels appropriate for the $25 billion oil economy we had not long ago, and the inevitable re-balancing may impact every political subdivision. There was a time when GAAP didn’t require a full accounting of pension devices of this sort but accountants have caught up with this particular cabal. Anchorage taxpayers should consider calling a halt to this if possible given the description in this column.

    Interest on the debt would be in addition to issuance costs of course. This will be a sweet deal for the underwriting syndicate(which in almost all instances doesn’t buy the debt until it is priced and resold), and it can happen that some of the investment bankers’ bonuses come back later as campaign contributions. It goes without saying that I would not expect this to be a competitive sale of debt.

  2. This pension system and its associated liability is NOT the other pension to which MOA Police and Fire employees are entitled, the State’s Public Employees Retirement System (PERS). I didn’t know about it until I was on Mayor Sullivan’s Transition Team and discovered how much MOA was paying for its own police and fire retirement system IN ADDITION TO the State PERS police and fire retirement system in which the MOA also participates. I haven’t looked at it in great detail but it appears that the police and fire employees believed they shouldn’t be subject to the surly bonds of the State’s changes in the PERS system, all concessionary in benefits, but rather since they’re special, they should have their own system, paid for directly by ANC taxpayers so they didn’t have to accept the State’s reductions in benefits over they years. I don’t know which mayoral administration did it so I don’t know if it was a stupid Republican or a corrupt Democrat, but we’re all still going to pay for it.

  3. If the city has to pay back $68.6 million by paying $10.3 million per year, that would take six years to pay off, so what do you mean “In the past years, the $10.3 million minimum payment was included in the operating budget,” yet the city is going to make a lump-sum payment of $68.1 million? If the city has been paying $10.3 million in past years, it wouldn’t still owe $68.1 million. What am I missing? Does the $10.3 million payment include interest on the $68.6 million, and if so, what is the rate and how does it compare to the interest on the new $68 million Berkowitz will be borrowing?

    Also, you state that Berkowitz’s deal would require paying $6.4 million for “decades” into the future, all the way to 2033. That is 16 years, not decades.

    I get your point- he is mortgaging the city’s future budget obligations to have more for his budget now, but there are some facts missing that will show whether this deal is a poor financial decision or not. I would like those facts.

      20 This ordinance will allow the Municipality to finance a percentage of its pension
      21 obligations.
      23 Currently, the Anchorage Police and Fire Retirement System (“System”) is
      24 approximately 80% funded, with an unfunded actuarial liability of approximately
      25 $75.7 million. It is expected to pay benefits through 2044.
      27 To fully fund the System, the actuaries estimate that the Municipality needs to
      28 make payments into the System in excess of $10.3 million for the next ten years.
      29  Assuming no material change in annual actuarial forecasts during the ten years
      30 and assuming that the System achieves its forecasted rate of return on
      31 investment, the Municipality’s obligation would be complete.
      33 This ordinance would essentially allow the Municipality to forward-fund several
      34 years of contributions by making a lump-sum payment into the System of
      35 approximately $68.1 million. That amount would be treated as a “credit” against
      36 the Municipality’s annual payment obligation. Following the financing, the
      37 Municipality’s payments to the System for at least the next six years would be
      38 eliminated.
      40 The arrangement offers at least three types of benefits to the Municipality: a
      41 liquidity benefit; a potential cost-saving benefit; and a trust benefit.
      43 As to the first, the net financial effect of the ordinance would be to reduce the
      44 Municipality’s net obligations to the System by more than $10 million in 2018; and
      45 by approximately $3.9 million in years 2019 through 2023. Debt service on the
      46 amount financed in December 2017 would be approximately $6.4 million per year
      47 through 2033. All other things being equal, it is simply more manageable for the
      1 Municipality to shoulder smaller payments over 16 years than annual payments in
      2 excess of $10 million over 10 years.
      3 As to the second, the ordinance would require the Municipality to incur new debt
      4 service obligations currently estimated to be approximately $6.4 million per year,
      5 beginning in 2019 and extending through 2033. But the arrangement may result in
      6 cost savings, net of the additional debt service, for two reasons: first, because
      7 returns on the lump-sum payment into the System may reduce the Municipality’s
      8 remaining future obligations to the System in an amount that exceeds, and fully
      9 offsets, the Municipality’s financing costs; and second, because the Administration
      10 anticipates that the Board overseeing the System may agree to further
      11 “reamortize” the Municipality’s payment obligations. This reamortization is
      12 anticipated to permit the System to reach full funding on a timeline more
      13 commensurate with the anticipated remaining life of the System if the financing
      14 arrangement is approved and the anticipated $68.1 million lump-sum payment is
      15 made.
      17 As to the last, the ordinance will permit the Municipality in the very near term to
      18 return the System significantly closer to full funding, confirming the Municipality’s
      19 commitment to fulfill the promises it made to its former public safety employees.
      21 The Police and Fire Retirement System 22
      23 The Municipality established and maintains a defined-benefit retirement system for
      24 police officers and firefighters who worked between 1968 and 1994.
      26 The “System” consists of three “plans”: Plan I (established in 1968); Plan II
      27 (established in 1975) and Plan III (established in 1984). All three plans were
      28 “closed” by 1994, when the Municipality began enrolling newly hired police officers
      29 and firefighters into the state’s PERS system.
      31 Today, the System serves approximately 740 members. Only approximately 17
      32 members of Plan III (hired prior to 1994) are still active municipal employees. (No
      33 members of Plan I or Plan II are still employed by the Municipality).
      35 By 1997, the System was significantly overfunded. Debates about how surplus
      36 assets in the System should be distributed resulted in protracted litigation. In
      37 2000, nearly $100 million was cashed out of the System as a result of a broad
      38 litigation settlement. The Municipality received $40 million of the surplus;
      39 beneficiaries received approximately $58 million. By 2009, as a result of the cash
      40 out and market downturns, the System no longer had assets sufficient to cover
      41 benefits promised to beneficiaries; it was less than 75% funded. It is approximately
      42 80% funded today.
      44 Structure of Certificates of Participation
      45 Certificates of Participation (COPs) are commonly used by state and local
      46 governments to access funds in the capital marketplace and use various property
      47 owned by the government as collateral for investors in the COP transaction.
      48 Generally, the Chief Fiscal Officer is authorized and directed to solicit proposals
      49 from and select a financial institution to act as the Trustee for the series of COPs
      50 (the “Trustee”). Under the terms of the Ground Lease, the Municipality will lease
      51 certain assets (buildings) to the Trustee in exchange for an upfront payment
      1 (proceeds of the COPs). Under the terms of the Facility Lease and Trust
      2 Agreement, the Trustee will lease the assets back to the Municipality in exchange
      3 for the commitment of the Municipality to make lease payments to the Trustee.
      4 The Trustee will then issue Certificates of Participation in the lease payments to be
      5 made by the Municipality. The Chief Fiscal Officer is authorized to select the
      6 assets that will be subject to the lease/lease back, with the expectation that the
      7 value of the assets will be approximately 120% of the principal amount of the
      8 COPs. Upon the execution and delivery of the Ground Lease and the Facility
      9 Lease and Trust Agreement, the Trustee authenticates and delivers COPs,
      10 pursuant to the terms of the Facility Lease and Trust Agreement, in the lease
      11 payments to be made by the Municipality under the Facility Lease and Trust
      12 Agreement. The proceeds of the sale of the COPs are expected to be $68.63
      13 million and will be used to fund a portion of the Municipality’s unfunded pension
      14 liabilities of the System and to pay for costs of issuance for the COPs. The Chief
      15 Fiscal Officer is authorized, empowered and directed to perform all such acts and
      16 things and to execute all documents as shall be necessary to carry out and comply
      17 with the provisions of the Ground Lease and the Facility Lease and Trust
      18 Agreement and participate in and approve a plan of marketing for the COPs. The
      19 costs of issuance, including the costs of any insurance policies, if any, required,
      20 may be paid from the proceeds of the COPs. The COPs shall not constitute a
      21 general obligation of the Municipality to which the full faith and credit of the
      22 Municipality are pledged. Lease payments by the Municipality under the Facility
      23 Lease and Trust Agreement shall be subject to appropriation. However, the
      24 Facility Lease and Trust Agreement may include a covenant on the part of the
      25 Municipality, through the Mayor, to include such lease payments coming due in
      26 each fiscal year in the Mayor’s proposed budget to the Municipal Assembly in
      27 each such fiscal year.
      29 Prior Use of COPs by the Municipality
      30 On at least two prior occasions the Municipality has successfully used Certificates
      31 of Participation to fund certain pension related unfunded liabilities of the
      32 Municipality. In 1985 Assembly Ordinance 85-176 authorized the lease and lease
      33 back of the Police Headquarters Flanigan Building, the Sullivan Arena and the
      34 Egan Center for the COP transaction, the proceeds of which funded certain
      35 unfunded pension related liabilities of the Municipality. The transaction was
      36 subsequently completed in 1986. In 1995, Assembly Ordinance 95-211
      37 authorized the Municipality to execute a similar transaction using the same three
      38 buildings for the purpose of using the proceeds of the COPs to refinance the 1986
      39 COPs.
      41 Background and Current Proposal
      42 Based on the current analysis of Milliman, the System’s actuary, dated April 20,
      43 2017, the Municipality is obligated to pay approximately $10.3 million to the
      44 System for at least the next 10 years to fully fund the System using current
      45 assumptions cited in the most recent report from the System’s actuary.
      46 Alternatively, Milliman has indicated that a lump sum deposit of $75.7 million in
      47 December 2017 would also fully fund the System. However, fully funding the
      48 System with one deposit in December 2017 could result in an overfunded position
      49 depending upon the realized return of the System over time. An overfunded
      50 amount may not be returned to the Municipality and may actually cause other
      51 problematic issues for both the System and the Municipality. The current proposal
      1 is to fund the System to an approximate 90% funded level with a deposit of $68.13
      2 million in December 2017. This deposit will effectively act as a ‘credit’ toward
      3 future annual deposits required by the Municipality until depleted. Therefore, this
      4 deposit is expected to eliminate the Municipality’s operating budget requirement of
      5 $10.3 million for six plus years. However, the budget will accrue a new liability of
      6 approximately $6.4 million per year beginning in 2019 as lease payments under
      7 the Facility Lease and Trust Agreement. The ordinance limits the Chief Fiscal
      8 Officer to selling an amount of COPs to fund approximately 90% of the unfunded
      9 liability of the System and to pay for costs of issuance for the COPs. The
      10 proceeds of the COPs, as previously mentioned, are expected to be approximately
      11 $68.63 million.
      13 Budget Impact
      14 The Municipality is currently obligated to deposit $10.3 million into the System in
      15 fiscal year 2018. This financing will eliminate this same amount from the 2018
      16 budget and help close the current 2018 budget gap by $10.3 million. Hence, the
      17 2018 operating budget savings is $10.3 million and in the following six plus years,
      18 the operating budget savings is $3.9 million.
      20 Timing of Proposed COP Transaction
      21 October 10, 2017
      22 October 20, 2017
      23 October 24, 2017
      24 December 7, 2017
      25 December 20, 2017
      27 January 1, 2019 28
      29 The Administration recommends scheduling a public hearing for this bond
      30 ordinance on October 24, 2017.
      34 Prepared by:
      35 Approved:
      36 Concur:
      37 Concur:
      38 Concur:
      39 Respectfully submitted:
      Introduction to Assembly Assembly Worksession Assembly Public Hearing Sell COPs
      Close the sale of the COPs and Deposit of Proceeds of the Sale of COPs into Police & Fire Retirement System First debt service payment on the 2017 COPs
      Ross Risvold, Public Finance & Investments Manager Robert E. Harris, CFO
      William D. Falsey, Municipal Attorney
      Lance Wilber, Director, Office of Management & Budget Michael K. Abbott, Municipal Manager
      Ethan A. Berkowitz, Mayor

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