Oil prices continue to lurk at less than $40 per barrel, and despite hope for a legislative salve, Standard & Poor’s is lowering the state’s debt rating.
S&P lowered Alaska’s general obligation debt from AAA status to AA+ and lowered the state’s appropriation-backed debt and Alaska Municipal Bond Bank’s debt from AA+ to AA. It also lowered bonds issued by the Alaska Energy Authority to A+ from AA.
Standard & Poor’s said in release the state’s widening budget deficit tied to oil prices spurred the decision.
“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 update, the price per barrel anticipated for the fiscal year that started last July 1 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.”
Standard & Poor’s also said it expects Alaska’s credit rating to continue its fall if the Alaska Legislature does not “enact significant fiscal reforms to reduce the state’s fiscal imbalance” during the upcoming 2016 session.
“In the event policymakers continued to take no action, the current initial rating change most likely represents the first step in a downward migration that would likely accelerate as the state’s reserve balances approached depletion,” the report concludes. “If lawmakers succeed in putting the state on what we view as a glide path to a sustainable fiscal structure, with its strong reserve balances still intact, we could revise the outlook to stable.”
Gov. Bill Walker said Standard & Poor’s is too hasty in downgrading the state’s credit, but takes it as a spur to decisive actions. Lawmakers, he said, will have to buckle down in the upcoming months.
“The action taken by Standard & Poor’s to lower Alaska’s credit rating is concerning and premature given that the legislature has not had time to act on a long-term fiscal plan,” Walker said in a press release. “However, this further solidifies the need to address our state’s fiscal challenges in the immediate future. As noted in S&P’s release today, Alaska has significant financial assets that, if properly utilized, can help build fiscal stability for our state.”
S&P revised the state’s outlook from stable to negative last August, warning the Legislature had to take action in 2016 to avert a downgrade. Senate Finance Co-Chair Anna MacKinnon, R-Eagle River, said she was disappointed in the downgrade coming before the Jan. 19 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 in a formal statement. “When we gavel into session on Jan. 19, the Senate Finance Committee will tackle these difficult issues and work toward 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.
“Given that lawmakers have yet to coalesce around either the governor’s proposal or some alternative, we therefore continue to evaluate the state’s creditworthiness largely according to its existing budgetary framework,” S&P wrote.
“Through this lens, and in light of the unrelenting oil price declines, the state’s fiscal structure is deeply misaligned and its reserves, while still significant, are declining at a fast rate.
“The stakes are high for the state to enact a package of fiscal reforms that would help stabilize the state’s credit quality at a high rating level.”
S&P also weighed in on the administration’s idea to sell pension obligation bonds and finance its $13 billion share of the Alaska LNG Project.
“Part of the administration’s medium term fiscal strategy involves using pension obligation bonds in an effort to drive down the budgetary cost of funding actuarially sound annual contributions,” the agency wrote. “On the economic development front over the longer term, we understand the state is interested in seeing its estimated 30 trillion cubic feet in natural gas reserves get developed. And lacking a mechanism for delivering the gas to market, state officials are contemplating partially debt-financing a natural gas pipeline.
“Both propositions make less economic sense, however, in a scenario where the state’s credit rating is significantly lower and its cost of capital materially higher.”
DJ Summers can be reached at email@example.com.