Rating agencies predict improved outlook for Alaska, but note risks from fiscal uncertainty

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Deven Mitchell, State Investments Officer, Department of Revenue, provides an overview of credit ratings and state debt to the Senate Finance Committee, Feb. 4, 2019. (Skip Gray/360 North)

As Alaska lawmakers decide what to do with the budget, one group watching the results are the agencies that assess the state’s ability to service its debts. As the fiscal situation has deteriorated in recent years, agencies downgraded the government’s credit rating 10 times between 2016 and 2020.

But rating agencies see an improvement in Alaska’s outlook.

Last year saw oil prices stabilize. And investment growth has added to the Alaska Permanent Fund.

Edward Hampton said both are good news for the state budget. He has analyzed Alaska’s finances since Sarah Palin was governor. And he worked on a Moody’s Investors Service report in April that revised Alaska’s credit rating outlook from negative to stable.

“Alaska is a state adjusting to a new approach to the oil industry,” he said. “And a big part of that is being able to rely on permanent fund revenue on a systematic basis.”

It’s not just the oil and investment markets that have helped. Hampton said the state’s three years of sticking to a plan to tap into permanent fund revenue is also a reason for the improving outlook.

“For the time being at least, we accept that the state adheres to its structured drawdown approach and will not try to deviate from it in a dramatic way that would deplete the permanent fund revenue reserve account,” a- he declared. “Obviously there is a risk if the state goes in the direction of paying higher dividends.”

This week, lawmakers are debating a budget that would pay a dividend of $1,100, less than half the amount proposed by Gov. Mike Dunleavy.

Despite the improving outlook, Moody’s currently only gives two states lower credit ratings than Alaska: Illinois and New Jersey.

And Hampton said Moody’s likely needs to see lawmakers make it clear that they won’t take more permanent fund revenue than expected until the state’s credit rating is upgraded.

In May, S&P Global Ratings also changed Alaska’s credit outlook from negative to stable this spring. Like Moody’s, S&P analysts cite improvements in oil prices and ongoing fund earnings.

State debt manager Deven Mitchell said there are practical benefits for the state and its residents when rating agencies see an improving outlook. In his job, Mitchell tries to protect the state’s credit rating.

Mitchell said the revised outlook allows municipalities in Alaska to refinance loans at a lower rate — and the city of Sand Point and the Southeast Alaska Power Agency took out new loans at lower costs — through the municipal bond bank.

“And so if it was just, you know, a tenth of a percent, it still makes a big difference when you’re talking about a few hundred million dollars of bonds issued,” he said.

But Mitchell noted that ratings agencies continue to point out the risks associated with uncertainty about how much permanent fund revenue will be drawn from.

A third agency – Fitch Ratings – did not revise its negative outlook for Alaska this spring. Fitch analysts have expressed concern that the permanent fund’s revenue reserve could be reduced if investments decline and the state pulls in more than expected.

A provision of the budget compromise proposal currently under discussion could increase this concern. The budget would transfer $4 billion from the revenue reserve — which is not protected by statutory spending — to the fund’s constitutionally protected principal.

Mitchell said he understands why lawmakers are proposing the transfer.

“That, from a long-term perspective, is in my opinion a smart thing to do, a prudent thing to do,” he said. “But a strict ‘How are you going to pay your bills?’ point of view, you know, cash is king. You want to have cash to pay your bills.

But Mitchell said while there are divisions over the budget, lawmakers have been less dire in their predictions than they were when agencies repeatedly downgraded Alaska’s credit rating. And he said it helped improve credit prospects.

“I think it’s made a big difference: it’s just the tone of the discussion in the state of Alaska, even though some of the same issues remain,” he said.

Legislative budget negotiators hope to pass the budget before Thursday, when state workers are expected to receive layoff notices.

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