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Business/Economy

S&P warns Alaska again of possible credit downgrade, citing need for fiscal reform

  • Author: Annie Zak
  • Updated: June 20, 2017
  • Published June 20, 2017

A major credit rating agency said Tuesday that it will likely lower Alaska's credit rating if the state does not adopt fiscal reforms that lawmakers in Juneau have been wrestling over for months.

Standard & Poor's, one of the "big three" rating agencies, put Alaska's AA+ credit rating for its general obligation bonds on what it calls "CreditWatch," with "negative implications," the firm said in a report.

"(W)ithout structural fiscal reform in the 2017 legislative session, we would likely lower the state debt ratings," S&P said, adding that it expects lawmakers to enact a budget for the 2018 fiscal year in the next 90 days. If the state adopts "a balanced budget with fiscal reforms that does not significantly rely on reserves," the agency said it may remove the state's ratings from the credit watch without a downgrade.

The Legislature is currently tasked with passing an operating budget for the state government for the coming fiscal year, which starts July 1, and also passing long-term fiscal reforms. But, as Alaska Dispatch News reported last week, "lawmakers appear increasingly likely to skip over long-term reforms" in order to avoid a government shutdown on July 1.

“Essentially, we’ve recognized the state of the state’s finances over the last several years, running on reserves,” said Timothy Little, an associate director with S&P. 

Alaska depends on oil revenues to fund the budget. The state faces a multi-billion dollar budget deficit, spurred by the precipitous decline in the price of oil since 2014. This week, oil prices dropped to seven-month lows amid a worldwide glut, Reuters reported.

In its Tuesday report on Alaska's credit rating, S&P said the continued draw on the state's reserves is unsustainable.

Deven Mitchell, the state's debt manager in the Department of Revenue, said that because S&P's warning on Tuesday isn't a downgrade, the firm believes there is "potential for the state" to maintain its current rating.

“But if we continue not to be able to agree in the Legislature,” he said, “(S&P is) poised to let investors know that’s something they view as less credit-worthy.”

Gov. Bill Walker said in a statement Tuesday afternoon that S&P's announcement is concerning and disappointing, but not surprising.

"It is critical that we pass an operating budget for next year, and adopt a fiscal plan that does not continue our over-reliance on savings," Walker said. "I remain hopeful that we will be able to pull together and pass a budget and complete fiscal plan to secure Alaska's future, and demonstrate that we take our finances and budget issues seriously. Alaskans are depending on us."

S&P downgraded the state in January of last year from a top-shelf AAA rating to its current AA+. The firm also placed Alaska's rating on watch twice last year, in June and October, but both times it was removed from that status without receiving a downgrade.

The other two major credit rating agencies, Moody's Investors Service and Fitch Ratings, also downgraded Alaska's rating last year.

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