Fitch: Alaska credit rating downgraded because of gridlock over revenue measures

Kenny Knutson / KTUU
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ANCHORAGE (KTUU) Fitch Ratings on Tuesday downgraded $1.1 billion of bonds issued by the State of Alaska and shifted the state's credit outlook to negative, a move motivated by the inability of lawmakers to approve significant revenue measures this year despite a session that has stretched months beyond the voter-approved deadline.

"We were watching to see how the budget session unfolded and what revenue measures would pass to better balance the budget," said Marcy Block, a Fitch senior director behind the latest move. "There was no substantive revenue measure included in what passed, and that was something that was very critical for us to see included."

The other major credit rating agencies -- Moody's and Standard and Poor's -- previously took similar steps, but Fitch waited for the end of the regular legislative session to react.

Gov. Bill Walker said in a statement that he is not surprised by the announcement.

"With no significant new revenue measures passed to date, Alaska will burn through its savings in just a few short years," the governor said. "This further underscores the need to pass a sustainable fiscal package this year. We have all the tools to solve the problem."

Underwriting firms that purchase the bonds are likely to charge higher interest rates, quietly costing the state extra decades into the future.

$753.8 million in outstanding general obligation bonds as well as the state's long-term issuer-default rating went from AAA, the highest grade possible, down a step to AA+. $244 million in outstanding lease obligation bonds that are subject to annual appropriation went from AA+ to AA. Bond resolutions approved by the Alaska Municipal Bond Bank Authority in 2005, 2010, and 2016 were also downgraded.

In a report released Tuesday, Fitch offered detached analysis of the situation that has lawmakers still at work in Juneau nearly two months beyond the voter-approved limit:

The state's strong management of its financial operations and extraordinarily sizable reserve balances has historically offset volatility in its revenue sources; however, the state will be ending fiscal 2016 with its fourth consecutive operating deficit and a sizable deficit is expected in fiscal 2017. Available reserves are forecast to remain strong at the end of fiscal 2017 under various scenarios although eventual depletion is expected absent revenue reform, sharp expenditure reductions, or a return to more robust oil prices; a scenario that Fitch's views as unlikely through the medium term. While the state's permanent fund (PF) is robustly funded, it may only be accessed through an amendment to the state constitution, which is a limiting factor.
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Currently, one piece of approved revenue legislation from the special session was a change to the state's tax credits for oil and gas development that would initially increase revenues to the state beginning in fiscal 2018. The governor is currently reviewing this bill.

In addition to long-term outlooks turning for the worse, at the request of the state Revenue Department, Fitch reviewed $150 million of general obligation bonds that are scheduled to be sold via competitive bid on June 22. Those bonds were approved in 2012 as part of an overall $453.2 million bond issue for transportation projects, including upgrades to the Port of Anchorage, Seward Highway, Old Steese Highway, and more.

Deven Mitchell, the state debt manager who requested the report for the Revenue Department, said it is difficult to put an exact figure on how much the downgrade will cost the state in the sale scheduled next week. Underwriters like JP Morgan, Goldman Sachs, and Wells Fargo are competing to buy the bonds, and the organization to propose the lowest interest rate will win.

The downgrade from AAA to AA+ amounts to roughly 20 basis points, according to Mitchell, or one-fifth of 1 percent. That means Fitch's downgrade is likely to cost the state somewhere in the "low millions" over the 20-year life of these transportation bonds alone, the debt manager said.

"That's a rough estimate," Mitchell said, adding that he's working on a more exact number. "It's hard to say until you get into the market. There's already been an awareness of the state's financial position in the marketplace has been well documented not just by Fitch."

Block, the director behind Fitch's report, said the agency will monitor to see what happens and may re-assess if policymakers approve substantial legislation: "If there's newsworthy information from our perspective that has an impact on how we evaluate the credit, we can update our rating at any time," she said.