Berkowitz budget puts Muni property up for collateral - Must Read Alaska
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Berkowitz budget puts Muni property up for collateral

 BORROWS $60 MILLION FOR PENSION OBLIGATIONS

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.

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Suzanne Downing had careers in business and journalism before serving as the Director of Faith and Community-based Initiatives for Florida Gov. Jeb Bush and returning to Alaska to serve as speechwriter for Gov. Sean Parnell. Born on the Oregon coast, she moved to Alaska in 1969.

Latest comments

  • 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.

  • 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.

  • 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.

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