Rating Agencies Predict Improving Outlook For Alaska, But Note Risks From Fiscal Uncertainty

State Debt Manager Deven Mitchell provides an overview of the state’s credit and debt ratings to the Senate Finance Committee in 2019. Mitchell on Friday said the improved outlook for State credit had resulted in lower costs for municipalities. (Photo by Skip Gray / KTOO 360TV)

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

But rating agencies see an improving outlook for Alaska.

The last year saw oil prices stabilize. And the growth in investment has contributed to the Alaska Permanent Fund.

Edward Hampton says 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 the outlook for Alaska’s credit rating from negative to stable.

“Alaska is a state that is adapting to a new approach to the petroleum industry,” he said. “And a big part of that is being able to count on the income of the permanent fund on a systematic basis.”

It’s not just the oil and investment markets that have helped. Hampton said the three years the state stuck with a plan to take profits from permanent funds was also a reason for the improved outlook.

“For now at least, we accept that the state adhere to its structured drawdown approach and not try to deviate from it in a dramatic way that would deplete the permanent reserve account of the fund’s income,” a- he declared. “Obviously there is a risk if the state moves 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 of the amount proposed by Gov. Mike Dunleavy.

Despite the improved outlook, Moody’s currently only gives two states worse credit scores than Alaska: Illinois and New Jersey.

And Hampton said Moody’s would likely need to see lawmakers make it clear that they won’t be drawing more income from the permanent funds than expected before the state’s credit rating is raised.

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 to the state and its residents when rating agencies see an improving outlook. In his work, Mitchell tries to protect the state’s credit rating.

Mitchell said the revised outlook allowed Alaskan municipalities 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 cost – 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 rating agencies continue to highlight the risks associated with uncertainty about how much will be drawn from the earnings of permanent funds.

A third agency, Fitch Ratings, did not revise its negative outlook for Alaska this spring. Fitch analysts expressed concern that the permanent fund’s profit reserve could be used if investments were reduced and the government withdraws more than expected.

A provision in the budget compromise proposal currently under debate could increase this concern. The budget would transfer $ 4 billion from the profit reserve – which is not protected by statutory spending – to the principal of the constitutionally protected fund.

Mitchell said he understands why lawmakers are proposing the transfer.

“This, from a long-term perspective, in my opinion is a smart thing to do, a prudent thing to do,” he said. “But from a strict ‘how are you going to pay your bills? Prospect, you know, money is king. You want to have cash to pay your bills.

But Mitchell said that while there are divisions over the budget, lawmakers were less catastrophic in their predictions than they were when agencies repeatedly lowered Alaska’s credit rating. And he said it helped improve the credit outlook.

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

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

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