A major credit rating agency issued a heads-up to investors on Tuesday, warning in a 2020 outlook report that Gov. Mike Dunleavy’s plans to pursue large Permanent Fund Dividend payments and enact constitutional amendments restraining spending could “negatively” impact the state’s credit rating, if they are enacted.
Alaska’s credit outlook remains stable, after its rating was downgraded to AA-, from AA, in September, said Arlene Bohner, Fitch’s head of U.S. state and local governments. At the time, Fitch lowered ratings a single notch on more than $1.3 billion in state-backed bonds.
Fitch’s outlook for Alaska’s rating is not expected to change over the next one to two years, Bohner said in an interview. But depending on what actions the state takes, things could change.
Fitch’s report said:
“Alaska will face key questions on gubernatorial proposals, which may weaken operating flexibility. Fitch expects the governor will continue to seek a full dividend payment for residents and legislative approval for a set of constitutional amendments, constraining operating flexibility.
“The legislature will continue to discuss constitutional amendments the governor proposed earlier this year, which, if enacted, could weaken the state’s budgetary operating flexibility and negatively affect Alaska’s (credit rating).”
Dunleavy’s office issued a statement Tuesday saying Alaska policy makers understand the importance of “operational and fiscal flexibility." That has to be balanced with sustainable spending, revenues and growth, according to the statement emailed by Jeff Turner, a spokesman for the governor.
“In other words, we must protect the ability of future generations of Alaskans to have access to our considerable financial resources" in the $65 billion Alaska Permanent Fund, the statement from Dunleavy’s office said.
“All policy makers, including the governor and the Legislature, are committed to making the responsible decisions,” the statement said. “The discussion is hard and involves multiple important perspectives. But make no mistake, at the end of the discussion, Alaska will be fiscally strong, indefinitely sustainable, and operationally flexible.”
Dunleavy has proposed three constitutional amendments: One would require voter approval of new taxes and tax increases; the second would enshrine the Permanent Fund dividend in the Alaska Constitution; the third would tighten the state’s existing spending cap.
The governor has also proposed annual dividend payments based on the traditional formula in state law. The Legislature this year approved a $1,600 dividend, declining to approve the $3,000 dividend the governor sought because doing so would have required violating a spending limit approved last year.
The governor still wants to see payment of the full 2019 dividend and “will take that up with the Legislature when the session begins next month,” Turner said by email.
The governor also still plans to pursue additional dividend payments to make up for dividend reductions in previous years back to 2016, Turner said.
In its report, Fitch says it expects stability for most state and local governments in 2020, even amid a slowing national economy and other uncertainties. The report is called, “Fitch Ratings 2020 Outlook: U.S. States and Local Governments.”
But Fitch said Alaska is one of three states, including Illinois and Kentucky, facing potential changes that could have implications for "credit quality.”
Fitch’s credit rating for the state, at AA-, is three notches below the top-rated AAA, Bohner said. Fitch held a AAA rating for Alaska as recently as spring 2016, before the rating began to slide among Alaska’s huge budget deficits.