S&P drops Alaska's credit rating and warns of further downgrades

Credit ratings agency Standard and Poor's on Tuesday dropped Alaska's gold-plated credit rating and warned of more turmoil ahead unless lawmakers act to close the state's massive budget gap.

In another signal of trouble in the state's economy, S&P, one of the nation's three major ratings agencies, lowered Alaska's general obligation credit to AA+ from its top ranking of AAA, citing the long-term worldwide crash in oil prices.

Tax and royalty revenues tied to oil make up two-thirds of Alaska's unrestricted general fund revenue this year. The crash in prices has, as S&P said in its report Tuesday, created a "large structural gulf between unrestricted general fund revenues and expenditures."

That gulf has widened further as oil prices have continued to fall, the report said.

In August, S&P warned it could drop Alaska's rating — potentially by more than one notch — if lawmakers didn't act to close the state's $3.5 billion budget deficit during their 2016 legislative session, which begins later this month.

But Gabe Petek, S&P's chief Alaska analyst, said in a phone interview from San Francisco that new bonds being issued by Alaska's municipal bond bank spurred a recent review. And since S&P's summer report, Alaska's fiscal picture has only gotten worse — bringing a downgrade sooner than expected.

In the state's fall revenue forecast, issued last month, Gov. Bill Walker's administration said lower oil prices would bring the state just $1.6 billion in unrestricted revenue for the 2016 fiscal year, as opposed to the $2.2 billion predicted in the spring.

Even last month's forecast may prove to be overly optimistic: It projects oil prices at about $50 a barrel, while Monday's price for a barrel of North Slope oil was $35.95, according to the state revenue department.

"The information that has come out since the August time frame has not been favorable," Petek said. "The gap has been growing — the oil prices have been unrelenting in their decline."

Alaska's credit rating will likely keep dropping unless lawmakers enact "significant fiscal reforms" during this year's legislative session, S&P's report said. The state has enough savings to fix its structural budget gap "if it can assemble the necessary political will to adopt the necessary changes," S&P said — but such a fix will likely require politically unpalatable measures like taxes or cuts to Alaskans' Permanent Fund dividends, or both.

Walker last month proposed a broad overhaul of Alaska's finances designed to insulate the state budget from swings in oil prices — instead relying on investment returns from an enhanced Permanent Fund. His proposal relies both on an income tax and reduced dividends; next year's payout would be $1,000 instead of this year's $2,072, with even smaller dividends in the future.

In a news conference Tuesday at his Anchorage offices, Walker said S&P's downgrade underscored the need for lawmakers to do something about the deficit, whether by adopting his plan or another.

"Doing nothing is absolutely not an option," he said.

He added that he appreciated S&P's analysis.

"I hope everyone's read it," he said. "If you haven't, I would encourage you to read it."

After Alaska's downgrade, only nine states carry S&P's top rating, according to Bloomberg, a business news service. Other states that rely on the energy industry for revenue are facing similar stress on their credit ratings, though Alaska was the first "casualty" to receive an actual downgrade from S&P, Petek said.

Calculating the financial impact of the lowered rating is "more of an art than a science," Deven Mitchell, the state's debt manager, said during a phone call Tuesday. But a rough estimate in current market conditions is that S&P's downgrade will cost the state about $1 million annually for each $1 billion in general obligation bonds issued, he said.

The Walker administration has said that general obligation bonds could be one way for the state to pay for its estimated $13 billion share of construction costs for a proposed natural gas pipeline from the North Slope — a proposition that could grow more expensive as Alaska's credit rating drops further.

Walker's administration is also considering issuing about $2.5 billion in pension obligation bonds. That's another type of debt instrument that, as envisioned, would borrow money with the assumption that it would earn higher investment returns than the state's interest costs — and that those profits could be used to help reduce Alaska's annual pension payments.

Both of those ideas "make less economic sense" if the state's credit rating is lower and its interest costs are higher, S&P's report said.

S&P says fiscal reforms like Walker's could help preserve the state's credit rating, and Moody's, another ratings agency, said in its own report Tuesday that the governor's proposal is "a bold effort to address the state's enormous budget imbalance."

But one factor in S&P's downgrade, Petek said, was a relatively tepid response by top lawmakers to Walker's plan.

"I read the newspapers in Alaska from my perch here in California, and I have to say that the uptake of the governor's proposals — there has been a pretty limited enthusiasm that we're perceiving from some of the key decision-makers," he said. "We don't operate oblivious to how policymakers are proceeding in their thinking about how to plan for the upcoming budget year."

In a prepared statement, Sen. Anna MacKinnon, R-Eagle River, the co-chair of the Senate Finance Committee, said she was "disappointed" by the downgrade. But she promised that when the legislative session begins Jan. 19, "t?he Senate Finance Committee will tackle these difficult issues and work toward balancing the budget."

MacKinnon said in a phone interview that she wasn't yet prepared to announce her own specific ideas for fixing the state's structural deficit, because "it just positions people to automatically respond." But she said senators are committed to fully vetting Walker's proposed legislation.

House Speaker Mike Chenault, R-Nikiski, said he was "very concerned" about the downgrade because of its potential impact on borrowing costs for the natural gas pipeline. And he questioned whether the release of the report, before lawmakers had been able to take a crack at reducing the deficit during the legislative session, was designed to put pressure on them.

He was also reluctant to describe how he and his majority caucus would go about fixing the fiscal problems outlined in S&P's report, saying that more ideas would emerge as lawmakers arrive in Juneau and start the legislative session.

"There's a number of us that think we need to do something," he said. "And we're going to look at all the options we have before we make a decision on which of those options we should take up, or which we shouldn't."

The headwinds from the state's fiscal crisis also caused S&P to change the outlook for Anchorage's AAA bond rating to "negative" in late October. But the city's chief fiscal officer, Robert Harris, said Tuesday that he didn't expect the state's downgrade to have an impact on local ratings.

"Anchorage is independent of the state's rating," Harris said. "Theirs is based on their revenue stream, and ours is based on a different revenue stream."

Harris said he's optimistic that Anchorage's diverse revenues and its fiscal policies will help the city retain its AAA rating this year.

He added, however, that the city does monitor the state ratings: "As we're residents of Alaska, this is important to us."

— Alaska Dispatch News reporter Devin Kelly contributed to this report.

Nathaniel Herz

Nathaniel Herz is a reporter for the Anchorage Daily News. He’s been a reporter in Alaska for nearly a decade, with stints at ADN and Alaska Public Media. He’s reported around the state and loves cross-country skiing.