Second credit ratings agency issues warning on Alaska budget risk

FAIRBANKS -- A second credit ratings agency raised a warning flag Thursday about Alaska's state budget.

Standard & Poor's said that "to avert credit quality deterioration, we believe the state must make material progress in reducing the deficit in its fiscal 2016 budget."

The statement follows the move Tuesday by Moody's Investors Service to lower the credit outlook for Alaska from stable to negative. Moody's did not lower the Alaska credit rating, which is an assessment of the ability of the state to pay its debts. The reduction in the credit outlook is an intermediate action, a signal that a future reduction in the credit rating is more likely than before.

A lower credit rating would mean it would cost the state more to borrow money, which would increase the cost of state and local government in Alaska.

Standard & Poor's said it is not changing the credit outlook for Alaska, but that future changes in the state's credit rating will depend on how Alaska responds to the collapse in oil prices. The expected state deficit for this fiscal year is $3.5 billion, mainly because of the oil price plunge, but Alaska has large cash reserves built up since 2008 when oil prices spiked.

"For most states, an operating deficit of this magnitude would likely result in immediate negative rating consequences. In Alaska's case, however, extraordinarily large budget reserves effectively buy the state time to deal with its structural misalignment," Standard & Poor's said.

The budget was not sustainable even with prices above $100, Standard & Poor's said, but the gap has widened considerably with oil prices below $60. Actions by the new governor and Legislature in setting Alaska's budget "will be important to the future direction of its credit quality."


"Nevertheless, we are not changing the rating or outlook at this time because even with the large shortfall that has emerged, the state projects that fiscal 2015 will end with total budget reserves of $9.6 billion, or 157 percent of expenditures."

"In addition, the state's permanent fund earnings reserve balance, which can be drawn upon with a majority vote of the Legislature, is expected to have a balance of $4.66 billion at fiscal year end, bringing the state's total reserves available for operations to 233 percent of expenditures."

Also on the plus side, it said, the state's reserves continue to earn money that can be used to pay for government operations. The Constitutional Budget Reserve Fund earned $1 billion in the last fiscal year, while the Alaska Permanent Fund earned $7.9 billion.

These increases and others allowed the state to boost its net asset position in fiscal year 2014 to $82 billion, up from $76 billion the preceding year.

In the current fiscal year, the earnings from the Constitutional Budget Reserve Fund and the Alaska Permanent Fund are expected to total $3.5 billion, which would be enough to cover the operating deficit.

But elected officials in Alaska have yet to propose the use of some Permanent Fund earnings to help balance the budget. The earnings can be spent with a majority vote of the Legislature, but the political opposition to doing so remains strong.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.