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Alaska Legislature

Alaska state debt is declining, but lawmakers still expect mammoth budget cuts

  • Author: James Brooks
  • Updated: February 5, 2019
  • Published February 4, 2019

JUNEAU — As state lawmakers and Gov. Mike Dunleavy prepare to debate $1.6 billion in cuts to state services, Alaska’s debt manager offered a rare bit of good fiscal news on Monday: The state’s debt is declining.

While the state’s payments on its pension and retirement debt are expected to rise for at least the next decade, the state’s other debt payments started declining in 2018 and will continue declining for at least the next decade, said debt manager Deven Mitchell of the Alaska Department of Revenue. Overall, that means debt payments will continue to decline — along with the amount of debt — if the state does not borrow any additional money.

The decline was expected and is not expected to aid lawmakers as they attempt to balance the budget this year, but it is good news in the longer term.

“I think we’re in a very sound state debt position,” Mitchell said after delivering presentations to the Senate Finance Committee and a bipartisan group of Representatives.

As of June 30, 2018 — the end of the most recent state fiscal year — the state had $13.5 billion in debt. The state’s unfunded retirement obligations — the difference between the state’s retirement investments and its expected payments — is $6.9 billion and is included in that total.

The state’s debt peaked in 2016 at just under $19.2 billion, according to Mitchell’s presentation. By 2026, half of that debt will be paid, according to Mitchell’s figures. The vast majority of the debt consists of money borrowed to pay for school construction and renovation.

Mitchell said the state’s declining debt load means it has the headroom to borrow money — if needed — for a major capital project or to meet the needs of a disaster.

Mitchell suggested borrowing a figure on the order of $200 million or $300 million would be possible without significant downside.

“It wouldn’t break the bank,” he said.

It probably would come at a higher cost, however.

Until 2016, the state had a top-of-the line credit rating from the three major rating agencies, something that allowed it to borrow money at some of the lowest interest rates available. In 2016, as the state failed for a second year to balance its multibillion-dollar budget deficit, those ratings began to decline. By 2017, only Illinois and New Jersey had worse ratings than Alaska. Mitchell told lawmakers Monday that the state’s credit ratings have since stabilized, and investment markets are waiting to see how the state balances its budget.

Mitchell’s forecast has its limits: It does not include borrowing that lawmakers have approved but not used. For example, the Legislature has already allowed the state to borrow up to $300 million to build the Knik Arm Crossing. That permission remains, even though the project is stalled.

It is more likely that the state will incur new debt to pay oil and gas companies. Last year, lawmakers voted to borrow up to $1 billion to pay companies that took advantage of a tax credit system created by the state to encourage petroleum drilling.

Lawmakers believe the state has an obligation to those companies, mostly smaller organizations that used the expected payments as collateral for other loans. The borrowing plan has been stymied by lawsuits and no money has been borrowed as yet.