Credit agency downgrades Alaska
As promised, the State of Alaska’s creditworthiness has taken another hit, just not from the latest raters to warn it was coming.
Moody’s Investors Service downgraded the state’s general obligation debt rating from Aa2 to Aa3 late Thursday with a continued negative outlook — equivalent to a downgrade from AA to AA- on the scale commonly used by other agencies.
It is the third time in less than two years that Moody’s has downgraded Alaska, each time citing the state’s continued multibillion-dollar annual budget deficits.
On June 20 S&P Global Ratings put Alaska back on its negative CreditWatch list, a not-so-subtle hint that it would be forced to downgrade its rating for the state again if major budget reforms are not made soon, but Moody’s beat S&P to it.
“The downgrade reflects the state’s ongoing structural budget imbalance, a small economy with concentration in energy production, large fixed costs, and heavy pension burden,” Moody’s analysts wrote in their associated report. “The rating recognizes that Alaska still has the means to solve its fiscal problems, and our baseline expectation remains that the state will do so before exhausting its still-considerable liquid reserves.”
Aa3 is the lowest rating still considered a “high grade” by creditors.
Officials in Gov. Bill Walker’s administration have stressed the fact that the Constitutional Budget Reserve, the state’s last remaining traditional savings account, will have about $2 billion left in it at the end of the current fiscal year next June, which would not be enough to cover another of similar-sized deficits. However, Moody’s considers the earnings reserve account of the Permanent Fund and its $8.5 billion in realized earnings to be liquid reserves.
Utilizing Permanent Fund earnings in a sustainable fashion is the centerpiece to the budget solutions pushed by Walker and supported but not finished by the Legislature. To date, the Permanent Fund’s income has never been used by the state for anything but paying dividends to residents.
The downgrade comes as legislators are headed back to Juneau to hopefully reach a deal on oil tax credit legislation in the last couple days of the special session called by Walker. And while a deal on the tax credits is far from the fiscal overhaul the credit agencies, the governor and most legislators themselves have said the state desperately needs, it is another step in that direction.
Walker said in a statement from his office — which is quite similar to the quotes he offered the last time Moody’s downgraded Alaska last July 25 — that the downgrade is “concerning but not surprising.”
“In spite of significant financial reserves and the lowest tax burden in the nation Alaska continues to operate with a structural budget imbalance that is, according to Moody’s, both unstable and unparalleled by any of the other 49 states,” Walker said. “In the last three years, Alaska has gone from the highest credit rating in the nation to the third lowest, better than only Illinois and New Jersey. We simply cannot afford to wait any longer to take our finances and budget issues seriously. Alaskans are depending on us. I will continue to work to resolve Alaska’s fiscal problems this year.”
In concert with lowering the state’s general obligation rating, Moody’s lowered Alaska’s revenue bond rating from Aa3 to A1 and its moral obligation bond rating from A2 to A1, which are “upper medium grade” ratings.
At the same time Moody’s affirmed the Alaska Municipal Bond Bank Authority’s A1 rating with a negative outlook.
The bond bank manages the state’s debt and has about $1.2 billion in outstanding bonds. Its rating was not affected because of the Legislature’s continued willingness to replenish the bond bank’s funds when need be, according to Moody’s.
Elwood Brehmer can be reached at email@example.com.