In Alaska’s newest credit rating, analysts see some economic upside

A new review by analysts from New York City-based Kroll Bond Rating Agency has delivered Alaska’s most positive fiscal checkup in years.

The firm, which has not previously examined Alaska, gave the state an AA credit rating in late July, the second-highest of 10 steps on the company’s rating scale.

The company expanded on that rating in a 15-page analysis that said the state remains vulnerable to swings in oil demand, but that it has exhibited “prudent fiscal management” in recent years.

Gov. Mike Dunleavy and Department of Revenue Commissioner Adam Crum called the report an upgrade from prior ratings done by other firms, Crum adding that it is “a significant achievement and a win for the state.”

Credit ratings, in addition to dictating the cost of borrowing money, serve as an independent measurement of a state’s financial stability, measured by its ability to repay what it borrows. Kroll Bond Rating Agency was established in 2010 and is one of 10 nationally recognized agencies.

Michael Taylor, a senior director for KBRA, said he had seen the governor’s statement and noted that this is the first time his firm has rated the state. He then added, “as of today, the rating represents the highest of the four credit rating agencies that presently rate the state.”

The three other ratings, in addition to being lower, are slightly older:

• As of March 2022, Moody’s Investment Service has Alaska at the fourth of 21 ranks. In January, the firm reaffirmed that ranking.

• Fitch Ratings service has the state on the high side of the third of 11 ranks it uses.

• Since last year, S&P Global has had Alaska on the higher side of the third step of its 10-step scale.

KBRA’s analysis concluded that the state currently holds a “moderate” level of debt, that its pension liabilities are similarly moderate, and that the state still has “exceptionally strong” financial reserves, even though the balances of both the Constitutional Budget Reserve and the spendable portion of the Alaska Permanent Fund have diminished in recent years.

An annual transfer from the Permanent Fund to the state treasury accounts for more than half of the state’s general-purpose revenue, and KBRA concluded that the fund is being handled well by both the Legislature and the corporation that operates the fund’s investments.

“It seems like there has been pretty good stewardship here, particularly in recent years (with) annual inflation-proofing transfers,” said Peter Scherer, a director with KBRA.

Though there is a global shift away from fossil fuels, KBRA concluded that Alaska has a “robust natural resource base, which will likely continue to serve as a key economic driver.”

While the administration of President Joe Biden has curtailed fossil fuel projects generally, his administration approved the Willow oil development on Alaska’s North Slope and has indicated support for the proposed trans-Alaska natural gas pipeline.

“We were impressed just by the magnitude of some of these projects … and the Biden administration appears to be supportive of this activity. It was just surprising, frankly,” Scherer said. “It certainly bodes well for the economy in the short to medium term here.”

The KBRA report noted that if Alaska is able to diversify its economy and tax base away from oil production, it could receive an even better rating.

Scherer said KBRA isn’t recommending a statewide sales tax or income tax specifically — lawmakers have debated both ideas — “but less reliance on the volatile oil and gas revenues would be favorable.”

That’s similar to what Moody’s Investment Service noted earlier this year, concluding that the state’s credit rating could benefit from “clarification of laws and governance practices guiding annual use of Permanent Fund earnings” and from “implementation of fiscal strategies that facilitate the state’s transition from reliance on oil revenues.”

Conversely, KBRA noted that if the state’s savings accounts continue to decline, the state’s good rating could decay.

Moody’s came to a similar conclusion, stating that the state could be downgraded due to “accelerating depletion of (the) Permanent Fund earnings reserve account or diminution of amounts available for transfer into it from (the) fund’s unrealized gains.”

Originally published by the Alaska Beacon, an independent, nonpartisan news organization that covers Alaska state government.