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Alaska needs new revenues in addition to budget cuts, says credit ratings agency

  • Author: Pat Forgey
  • Updated: September 28, 2016
  • Published July 17, 2015

JUNEAU -- Alaska's stellar credit ratings could be in jeopardy if oil prices remain low and the state fails to act to address its financial situation, a major credit ratings agency said this week.

In a look at how lower oil prices are affecting budgets in the nation's top oil-producing states, Moody's Investors Service praised Alaska's ample cash reserves but said action is needed to diversify revenues and cut spending to keep the rating.

Moody's is one of the nation's big three credit ratings agencies and has given Alaska its top AAA rating since 2010. That enables the state to borrow money at the lowest possible cost, as investors can be assured that money they lend Alaska will be repaid.

Ratings mean more than that, however, and accolades from ratings agencies are considered an indication of good overall financial and other management. The other big ratings agencies, Standard & Poor's and Fitch, also give Alaska their top ratings.

But as oil prices began to fall last year, Moody's noted a "negative outlook" for the state. That's sometimes a precursor to a dreaded downgrade, though the AAA rating has remained.

Thursday's report focused on Alaska's extraordinary reliance on oil revenues, even compared to other oil producing states.

Over the last several years, Alaska's general fund has relied 89 percent on oil revenues, compared to the next-highest state, New Mexico, at 19 percent.

In comparison, states with more diversified and stable revenue streams such as sales, property or income taxes have far lower reliance on oil. North Dakota, for example, is 6 percent reliant on oil revenues, while Texas is at 11 percent.

That's given those states much more flexibility to meet state needs, Moody's said.

"States such as New Mexico, North Dakota and Texas have been more insulated from the oil price drop and in fact have approved additional spending in their next budget cycles" despite the oil price drop, the report said.

While Moody's noted the "huge hit" to the Alaska budget from lower oil prices, it also noted the state's significant savings, more than three times its budget, it said. The savings it looked at included the Constitutional Budget Reserve but did not include the Alaska Permanent Fund.

But it warned of the rapid exhaustion of those savings without action.

"A rapid reserve-depletion scenario, especially in the absence of realistic plans to diversify tax revenue streams and/or impose strict expenditure cuts, would put downward pressure on the state's rating," the report said.

During the last legislative session, legislators focused on cutting spending, which the report noted included an 81 percent cut in capital spending and a 15 percent budget cut, including 81 percent of capital spending. But Moody's warned Alaska still had a $2.7 billion deficit.

That focus on cuts came despite Legislative Finance Director David Teal's reported warnings to lawmakers that Alaska could not cut its way to a sustainable budget.

Legislative leaders said they were leaving it to Gov. Bill Walker to propose new taxes while they were focusing on cuts. Additional cuts are still needed, said Rep. Craig Johnson, R-Anchorage, at the end of the session.

"We have a long way to go before we have a healthy budget," he said.

Walker Communications Director Grace Jang said the governor started the process toward that with the Building a Sustainable Future conference in Fairbanks last month, but he doesn't yet have new proposals.

"Alaskans have begun their own dialogs throughout the state about what kind of Alaska they want, what kind of services they want the state to provide, and how they want to pay for those services," she said.

That conference and the discussions it began will result in proposals for next year's legislative session, she said.

"We will take into consideration those conversations as we craft the FY17 budget," she said.

Moody's is predicting that oil prices will remain low, at least in the near term, and said that all oil-producing states are making budget changes because of that, though none as large as Alaska's.

In 2010, when Moody's gave Alaska the rating upgrade, it praised the state's prudent financial management and its savings, which were already large then but would grow larger.

"We believe the magnitude of reserves, along with conservative financial management, will lead to enduring fiscal strength under all plausible scenarios over the next five to 10 years," Moody's said in a news release then.

That was just about five years ago.

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