S&P joins Moody’s in downgrading state
S&P Global Ratings has made good on its warning, joining Moody’s Ratings Service in downgrading the State of Alaska’s credit ratings once again as legislators struggle to mend the state’s increasingly tattered finances.
S&P knocked the State of Alaska-backed general obligation rating down one notch to AA from AA+ early July 18, citing a “continued lack of agreement on fiscal reforms to return the state to structural balance,” in a statement accompanying the action.
On July 13, Moody’s also downgraded Alaska a notch on its scale, from Aa2 to Aa3 for general obligation debt, which translates to a final AA- rating.
S&P also lowered its opinion of state appropriation-backed debt from AA to AA-. Alaska Energy Authority bonds, which are backed by the moral obligation of the state, were also lowered from A+ to A on July 18.
The outlook on all the new ratings remains negative, according to the agency.
Subsequently, S&P took the state off its negative CreditWatch list, where it had put Alaska June 20. At the time, analysts for the agency said the CreditWatch action was an indicator that S&P would be forced to downgrade the state if a long-term fiscal plan to dissolve the ongoing $2.5 billion-plus annual budget deficits was not approved very soon.
“The negative outlook continues to reflect our opinion that if lawmakers fail to enact significant fiscal reforms to reduce the state’s fiscal imbalance during the 2018 legislative session for fiscal 2019 budget, Alaska’s downward rating transition will likely persist, possibly by multiple notches as its structural imbalance becomes more protracted,” S&P ratings analyst Timothy Little said in an agency release.
Funding the budget with savings for another year has left Alaska with just about $2 billion in unobligated funds in the Constitutional Budget Reserve, or CBR, the state’s last liquid traditional savings account, an amount insufficient to cover another year of like deficits. The State of Alaska has spent about $14 billion from savings in less than five years.
State debt manager Deven Mitchell said via email that the state has just more than $100 million in general obligation bonds left to sell from a $460 million bond package for construction projects that voters approved in 2012.
The bond bank manages the state’s debt and has about $1.2 billion in outstanding bonds. Debt service for the fiscal year 2018 budget signed June 30 is $209.4 million.
The latest downgrades could raise rates on future bond sales by 0.15 to 0.2 percentage points, according to Mitchell. But he also noted that the “relatively low impact” to state bond rates is due in part to a tight bond market, adding that the latest credit ratings could have up to 0.5 percentage points of impact in times of higher yield markets.
It was only about a year-and-a-half ago that Alaska had perfect general obligation ratings from the “big three” raters: S&P, Moody’s and Fitch.
When Alaska was going into the market to sell some of those 2012 general obligation bonds, S&P downgraded Alaska sooner than expected from its formerly sterling AAA bond rating in January 2016 and the other ratings agencies quickly followed suit with actions of their own.
Gov. Bill Walker, who has spent the last two years pitching his fiscal plan for the state to legislators and Alaskans at large, noted in a July 17 press briefing that the state’s credit rating has quickly gone from as good as it gets to only better than New Jersey and Illinois, whose fiscal problems have persisted for years.
“We’re better than that,” the governor said.
Walker also said he would not continue to call legislators back into special sessions as a means to force a fiscal reform package unless a deal is imminent, but at the same time reemphasized the need for a fix this year.
The Democrat-led House and Republican-led Senate passed similar bills to establish an annual percent of market value, or POMV, draw on the earnings of the $60 billion Permanent Fund during this year’s regular legislative session. Such a draw is the centerpiece to Walker’s fiscal plan, as it could reduce the deficit by nearly $2 billion per year.
However, the majorities in the bodies have not been able to reconcile the differing contingencies each has tied to enacting a Permanent Fund POMV draw. The House Majority wanted an accompanying income tax to cover the budget deficit while the Senate was comfortable with a smaller deficit that could be sustained with minimal draws from the CBR.
Elwood Brehmer can be reached at [email protected].