A major credit rating agency has slightly downgraded the Municipality of Anchorage’s bond ratings, citing the financial impacts of the pandemic, the 2018 earthquake, declining population, climate change and state fiscal policy. The slide from AAA status to AA+ has the potential to affect the interest rate at which the municipality can borrow money for major capital programs like school, road and park projects.
After the report was released, several Anchorage Assembly members, including Chair Suzanne LaFrance, and members of former city administrations, questioned whether Mayor Dave Bronson’s administration accurately depicted the city’s financial situation and options during its presentation to credit rating agencies.
In a written statement sent to news media on Tuesday, the administration pointed to the credit downgrade and negative outlook as evidence of overspending in the city’s recent budgets.
“The outlook on all ratings is negative,” stated a report from S&P Global Ratings sent out with the statement.
“These ratings are critical as we determine what the budget will look like in the upcoming fiscal year,” Bronson said at Tuesday’s Assembly meeting. “Based on this new information, I will have to consider, based on Assembly spending, a bond holiday. We cannot keep spending more than we have. We cannot do things that will harm our children and our grandchildren’s ability to live and work in the city. We have to set up our great city with a successful foundation in order to build and grow. We, as elected officials, have a responsibility to start making sound financial decisions. We must make responsible spending decisions to stay below the tax cap.”
LaFrance asked that the administration present to the Assembly and to the public exactly what it presented to the credit rating agencies, and said she had “some real challenges with the information presented in the administration’s press release.”
“Depending on how information is delivered to the agencies, that can influence how they make their decisions. For instance, in the S&P documents, it’s noted that oil prices have recovered and the bed taxes haven’t. From our Budget and Finance meeting with the administration last week, we know that’s not true. If that wasn’t communicated to the rating agencies, then that’s a huge problem,” LaFrance said.
In the mayor’s opening remarks during Tuesday’s meeting, Bronson criticized the Assembly’s spending and called for a “bond holiday.”
The administration’s statement also pointed to a “negative $40 million year-end 2020 fund balance for the Municipality.” The accounting behind that figure does not appear in the credit agency reports.
LaFrance argued that the city doesn’t have a deficit and that it accessed its fund balance to protect the community from a “once-in-a-century global pandemic.”
The S&P report cites the recent disasters in Anchorage as contributing to the city’s financial prospects.
“Capital expenditures from the 2018 earthquake, revenue declines from COVID-19 and the cost and labor shortages associated with construction in Alaska, and delayed Federal Emergency Management Agency (FEMA) reimbursements have forced the municipality to draw down its reserves,” the S&P report said.
“We believe that economic conditions are slightly improving, particularly tourism when compared with 2020, despite longstanding population and job loss trends, and that a good management team is making efforts to address these challenges,” the report says. “However, given the substantial challenges facing the municipality’s available reserves in the short term, we are lowering the rating and changing the outlook simultaneously.”
Positive and negative changes in credit ratings are often bandied as a political cudgel in city politics, held up as evidence that policies either are or are not working. Tuesday’s reports were sent out by the Bronson administration just hours before the Assembly took up amendments on the mayor’s proposed budget, which sought spending reductions by eliminating positions and programming. The Assembly made multiple changes to the budget, restoring funding to many city programs that Bronson had proposed cutting.
Former Acting Mayor and current Assembly member Austin Quinn-Davidson said that the city expects to recover much of the funds spent on the earthquake and pandemic through federal disaster assistance from FEMA and that she is puzzled by the city’s rating downgrade.
In May, during her tenure as acting mayor, she and her then-Chief of Staff Jason Bockenstedt met with the agencies and received “stellar reviews,” she said.
“There’s absolutely no reason that this rating would change in the course of a few months,” Quinn-Davidson said. “I mean, there’s just no reason — the facts haven’t changed.”
The main reason for S&P’s downgrade, according to the report, is that the dual emergencies of the 2018 earthquake and economic fallout from the pandemic contributed to the municipality spending down its cash reserves to below the 10% of expenditures typically retained by AAA-rated entities.
If the municipality can’t replenish the fund balance to levels it maintained in recent years, along with an additional 2% to 3% reserved for emergencies, the outlook could worsen.
Municipal Manager Amy Demboski during Tuesday’s meeting told Assembly members that one of the agencies “made it very clear that if the municipality continues to spend in the manner in which it’s been spending for the past few years, they could further downgrade our bond rating next year,” although she did not say which agency.
“One of the ratings agencies kept us stable. Another agency noted we blew through our savings,” said Bill Falsey, who served as municipal manager in the Berkowitz administration and was recently hired to work as outside counsel to the Assembly. Falsey also ran unsuccessfully for mayor earlier this year in the election that Bronson ultimately won.
“It makes me wonder what information was conveyed to them, because the municipality certainly has a lot of options to restore these emergency funds,” Falsey said.
He noted that Anchorage, like many other cities and municipalities around the country, is still waiting for reimbursements from FEMA for costs incurred during the pandemic, for functions like running a temporary emergency shelter out of Sullivan Arena and standing up testing and vaccination clinics. That money, which is expected to flow eventually from the federal government, would replenish some of the reserve funds. Falsey said the mayor’s words seemed to emphasize the modest rating downgrade and gloss over that much of the S&P report noted the city’s fiscal fundamentals are generally strong.
“What’s getting lost in the press release is if you removed the earthquake and COVID, everything is fine,” Falsey said. “It seems like a strong emphasis on a pretty transient situation that isn’t the result of irresponsible spending decisions.”
Anchorage lost revenues during the pandemic that would typically be collected from hotel taxes and tourism. Local construction projects have been stymied by labor constraints and supply chain issues that have slowed planned building.
Another factor contributing to a negative outlook is population decline: The report notes that between 2013 and 2020, the city’s population dropped by 13,000 residents.
“We consider the municipality’s environmental risks higher than the sector standard given Anchorage’s history with earthquakes and changing weather,” the report says.
Also affecting the local budget are decisions made by the Legislature. Anchorage, like other communities across Alaska, has had to spend more since the state reduced its school bond debt reimbursement program. In 2021, that left a $20.4 million gap the city closed by increasing property taxes.
The S&P report notes that most of the municipality’s revenues, around 70%, come from property taxes, which have so far remained stable in spite of population loss and statewide recession. The agency pointed out that the city also grew its MOA Trust Fund, adding $220 million from the sale of its electric utility. Under the city’s charter, that fund can spin off up to 5% in transfers to the general fund, unless more transfers are approved by voters.
“At this time, Anchorage officials do not plan on advocating for any changes to the formula,” the report says. “The Anchorage Municipal Code describes how the trust fund is managed and the Assembly can make changes at any time.”
Bockenstedt, who also served as chief of staff under former Mayor Ethan Berkowitz, said when he worked with the city, officials would meet with credit rating agencies for two hours and give a detailed presentation, with 40 to 50 slides.
“Without seeing that presentation, it’s kind of hard for me to put my finger on some of the things that ended up in the S&P document,” Bockenstedt said.
LaFrance said the Assembly worked with the previous administration to diversify its revenue so it relies less on state and federal money, strengthening Anchorage’s bond rating through the city’s electric utility sale, its 10 cent-per-gallon motor fuel tax and the city’s alcohol tax.
Some of the delays in FEMA reimbursements, Bockenstedt said, are because projects have to be fully completed before the federal government will send the money to local governments. Repairs to earthquake-damaged facilities are still ongoing. Likewise, across the country, municipalities are grappling with how to handle sprawling reimbursement procedures with FEMA to cover COVID-19 expenses.
“Every city in the country is dealing with this,” Bockenstedt said.