S&P finds Alaska with ‘unique exposure’ to oil prices

Standard and Poor’s Rating Services took a look at what makes some oil states’ futures look bleaker than others. The hardest-hit states forecasted oil prices too optimistically, tied too much state income to oil revenues, or didn’t save enough from the good old days when prices were high and state coffers were fat.

S&P analyzed eight states: Alaska, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming. Of the eight, S&P rated Alaska, Louisiana, and New Mexico has having negative credit outlooks.

Though S&P lowered Alaska’s credit rating from AAA to AA+ earlier this month, S&P analyst and report author Gabriel Petek said the state’s foresight to sock away oil money softens the blow.

“To their credit, they recognized that they have this dependence on oil revenue, and that oil production is an important part of their economy,” said Petek. “They were very shrewd to drain the boom, put aside a lot of this revenue that came in, and it’s providing the cushion.”

Alaska is singular among oil-producing states in its negative credit outlook from S&P. The other two states with negative outlooks, New Mexico and Louisiana, have to do with more factors than just oil price decline. Petek said New Mexico and Louisiana have a host of other fiscal issues unrelated to oil that make the credit pressure negative.

“Alaska is uniquely exposed to this problem, and the pressures and more acute directly because of oil,” said Petek. “It’s telling in a way that Alaska’s credit rating is the first one to already take a hit. They’re the most reliant on oil-related revenue of all the states.”

Most states with heavy oil revenue over-forecasted the price per barrel, but some, Alaska in particular, were particularly and damagingly upbeat about the assumption.

“In short, the more aggressive a state was with regard to its assumptions and use of oil-related revenues during the oil boom, the more acute its fiscal pressure now, in the oil price bust,” the report reads.

The Alaska budgeting process in the early 2010s put too much faith in the sky-high oil prices that sank in 2015. For fiscal year 2016, Alaska had based its budget on a price assumption of $67.49 per barrel, the highest of any major oil-producing state, and has since revised it downward to less than $50 per barrel for the current fiscal year.

In fiscal year 2017, the assumption is $56.24, nearly the highest estimate from any oil-dependent state.

Only North Dakota, a newcomer in the oil industry with a $45 per barrel price assumption for fiscal year 2017, comes close to what Standard & Poor’s believes realistic.

“At this point, all of the states in our survey still have a higher price forecast for 2016 than does Standard & Poor’s ($40 per barrel),” the report reads.

Overindulgence in general funds income from oil revenues is another key component to a negative credit outlook, lending credence to Gov. Bill Walker’s plan to funnel oil cash into the Permanent Fund rather than directly into unrestricted general funds.

“(Alaska has) a current structural deficit that equals 2/3 the budget,” said Petek. “Most states, they have a 5 percent deficit. You have big reserves and a big deficit.”

The Alaska government derived 79 percent of its state spending from oil-related revenues in fiscal year 2016, and 67 percent is estimated for 2017. No oil-producing state had anything approaching this level of oil-related revenues as a percentage of operating revenues; Wyoming drew 35.7 percent of operating revenue from oil, but no other states exceeded 13 percent for fiscal year 2016.

In comparison to Alaska’s direct to general fund model, other oil-producing states have stopgaps and checks to cushion commodity price swings, capping the full amount of unrestricted general funds tied to oil.

Montana’s general funds “are somewhat insulated” from oil and gas price bounces, as the state’s general fund only derives 3 percent of general funds from oil. North Dakota capped its oil-related general funds income at $300 million every two years, approximately 5 percent of the 2015-2017 general funds. Texas’ oil revenues only contribute 4 percent of the total spending, and natural gas another 2 percent.

Alaska’s credit-saving grace comes from savings, the third factor in S&P’s credit considerations.

“Some oil producing state have partially mitigated the effect of commodity market volatility on the their budgets by segregating the oil-related revenue, putting most of it in reserves or special funds,” reads the report.

Petek said Alaska’s mammoth Permanent Fund has spared the state from a worse credit situation. Alaska used oil-related revenue the most, but also saved the most. The state’s available savings are 312 percent of general fund spending, greater even than North Dakota and Texas, which have each 91 percent of general fund spending available in savings.

DJ Summers can be reached at daniel.summers@alaskajournal.com.

Updated: 
01/27/2016 - 3:56pm

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