Walker announces hiring freeze as S&P downgrades Alaska
Standard & Poor’s officially downgraded the State of Alaska’s credit ratings Jan. 5, citing bottom-of-the-barrel oil prices that continue to balloon the state’s budget deficit.
The downgrades drop the state’s general obligation debt rating from AAA to AA+; state appropriation-backed debt from AA+ to AA; and the rating on some moral obligation-backed bonds from the Alaska Energy Authority from AA to A+.
S&P also attached a negative outlook to each rating.
“The rating actions reflect our view of the state’s credit quality as oil prices have continued to slide, falling below forecasts from earlier this year, causing an already large structural gulf between unrestricted general fund revenues and expenditures to widen further,” said credit analyst Gabriel Petek in a release.
S&P noted that in the state’s fall revenue forecast released Dec. 8 the anticipated average price for a barrel of oil this fiscal year was revised downward from $66.03 to $49.58 per barrel, translating to a downward revenue adjustment of about $600 million.
“With just $1.6 billion in unrestricted revenue for the year, the state’s updated fiscal gap has ballooned to an estimated $3.55 billion,” S&P wrote. “More recent spot price trends have fallen even further, to below $40 per barrel as of mid-December, implying an even larger fiscal gap.”
Alaska State Debt Manager and Municipal Bond Bank Authority head Deven Mitchell said in an interview that the state could generally see a 0.1 percent increase on interest rates when it tries to sell bonds as a result of the downgrades.
Gov. Bill Walker in a press briefing characterized the impact as an extra $1,000 per year on every $1 million the state might borrow.
“It’s not that it’s a major downgrade, but it shows a trend and I think that’s what my concern is,” Walker said. “We’re moving down a trail we don’t want to be moving down.”
S&P downgraded Alaska’s credit outlook to negative in August, warning Walker and the Legislature to take action to resolve the state’s budget crisis or risk a credit downgrade. The downgrade came before the Legislature convened.
Walker noted that while it doesn’t change the Alaska’s situation, the state’s credit rating is still better than about half of the other states across the country.
Standard & Poor’s also said it expects Alaska’s credit ratings to continue to fall if the Alaska Legislature does not “enact significant fiscal reforms to reduce the state’s fiscal imbalance.”
Walker said he initially thought the rating agency should have at least given the state’s leaders a chance to address the situation, but added he’s looking forward to the legislative session that starts Jan. 19 as an opportunity to prove S&P wrong and fix Alaska’s fiscal gap.
“Doing nothing is unacceptable,” he said.
Senate Finance Co-Chair Anna MacKinnon, R-Eagle River, said she was disappointed in the downgrade before the start to the session.
“Their rationale then was that the legislature needed to take measures to stabilize our fiscal house — yet the legislature has not had a session since that revision to take action,” she said. “When we gavel into session on Jan. 19, the Senate Finance Committee will tackle these difficult issues and work towards balancing the budget.”
Walker has introduced a plan involving a combination of higher industry taxes, a state income tax, reduction in oil tax credits and a conversion of the Permanent Fund Earnings Reserve into a funding stream for the annual budget as a means to close the fiscal gap.
The downgrades will not immediately impact the state’s plan to sell bonds, Walker said. His administration has plans to build a $500 million, multi-year general obligation bond package to fund essential capital projects across the state during the session.
The ratings shift could also have a “fairly significant” impact on the Alaska LNG Project, Walker said, which the state has a 25 percent stake in, if the downgrades continue and the state goes out to borrow money for the project. He noted that paying for full construction is still several years off, giving the state time to rectify the situation.
Borrowing to pay for at least part the state’s share of AK LNG, currently pegged at $13 billion or more for the $45 billion-plus project, would seem to be a certainty.
Another proposal from the Walker administration would use pension bonds to lower the state’s annual retirement obligation. Mitchell said the state had been looking at 3.25 percent to 3.5 percent interest rates on 20-year general obligation bonds prior to the downgrade.
Hiring, travel freeze
State of Alaska jobs are going to be a little harder to come by after Walker’s administration instituted a state hiring freeze and travel restrictions Jan. 5 for all executive branch departments.
Walker said during a press briefing that measures mostly already in place to restrict hiring and travel for state department employees were made official during a Jan. 4 cabinet meeting in which about half of his cabinet staff teleconferenced between Juneau and Anchorage.
“Each department’s sort of been doing their own thing on travel and hiring so it was time to formalize it so we had some consistency across the table,” the governor said.
The hiring freeze applies to all of the roughly 15,000 executive branch employees, except those deemed “essential in protecting the life, health or safety of Alaska citizens,” according to a memo from Walker’s Chief of Staff Jim Whitaker to state commissioners.
Those essential positions include Alaska State Troopers, corrections and probations officers and employees providing patient and resident care at 24-hour state health and education institutions.
In keeping with all efforts to close the state’s $3.5 billion budget gap, revenue generating and collecting positions are also exempted, as are federally funded state positions and those funded with program revenue.
Non-essential travel has been prohibited. The 125 state boards and commissions have been asked to limit in-person meetings to one a year and teleconference otherwise.
Alaska has pushed through previous oil price dips that have restricted the state’s revenue stream without cutting its workforce, but Walker echoed petroleum industry analysts when he said this time is different.
“In the past we’ve always seen what they call the oil price bounce. There’s no bouncing in this one,” he said.
Hiring waivers for department positions deemed essential can be granted on a case-by-case basis Chief of Staff Whitaker. Similarly, travel exemptions can be sought from department commissioners and the state Boards and Commissions director, the memo states.
“We have attempted with this policy to balance the need to be efficient while saving money,” Department of Administration Commissioner Sheldon Fisher said at the briefing. “We do not want to in a harmful way impact the ability for departments to deliver their core mission.”
Walker said he asked leaders at the University of Alaska and other quasi-state agencies to consider implementing similar measures, though the governor has no jurisdiction over the outlying areas of government. He did not request that the legislative and judicial branches do the same, citing the separation of powers.
The governor also said it is too early to tell exactly how much the state will save from the measures.
Shortly after Walker announced the hiring freeze, a note clarifying the policy appeared on Workplace Alaska, the state’s job posting website. There were 129 general state positions and nine positions specifically for current state employees posted on the site late Jan. 5.
Walker’s administration says it has cut more than 600 positions, primarily through attrition and retirement, from the 15,800 executive branch positions the state had at the end of the 2015 fiscal year.
The state has directly laid off employees, but Walker indicated that is a last resort.
“There are lots of folks that are impacted on a layoff, not just the individual working — also their families and we feel very badly about having to do that,” he said.