PHOENIX – Alaska municipalities may bear the brunt of the state's oil-driven budget crisis.
The falling price of oil and declining in-state production have combined to hammer a state budget almost entirely dependent on oil revenues.
Alaska lawmakers are working to try to complete budget legislation that analysts see as key to retaining the state's credit quality, and local government officials fear that the state will roll its financial problems down to them.
Alaska's legislative session is set to close April 17th, but the state has yet to enact a budget that Gov. Bill Walker wants to include a wide range of sweeping changes to put the state back on a more firm financial footing.
The state lost two if its triple-A ratings this year and is increasingly forced to face a new financial reality as after falling oil prices left the state facing a more than $3 billion budget deficit.
While it's been clear for some time that Alaska and other states heavily reliant on oil and natural gas-related revenues would face challenges if oil prices remained at such low levels, rating agency pressure on Alaska began to mount early this year.
In January Standard & Poor's dropped its rating on Alaska's general obligation debt to AA-plus from AAA, while downgrading its appropriation-backed debt to AA from AA-plus.
In February, Fitch Ratings placed Alaska's AAA rating on a negative watch, and Moody's Investors Service downgraded the state to Aa1 from Aaa on March 1.
Though Alaska built up substantial reserves in the boom years, all three rating agencies say it needs a major budget reorientation to head off a major financial problem.
"Absent significant changes, low oil prices will continue to cause large budget deficits, reserve draws, and structural budget gaps of an unprecedented size for a U.S. state," Moody's said in its downgrade announcement.
Walker has pushed for significant structural changes to the state's finances through his "New Sustainable Alaska Plan" that he introduced with his budget proposal in December, even before the downgrades.
The plan includes using Alaska's $50 billion dollar Permanent Fund, which has until now been used to send annual checks to Alaska citizens, to help close the budget gap, along with a new income tax and new or increased taxes on mining, fishing, tourism, fuel, alcohol, and tobacco.
The legislature is holding hearings and ushering various budget and fiscal reform-related bills through the legislative process. Both chambers already passed operating budgets and are now in a conference committee to resolve the differences between the two versions, but are also continuing to consider other bills related to revenue increases and cost-cutting.
Both House and Senate panels are holding hearings over the next few days on a bill similar to a Walker proposal that would rewrite oil and gas tax credits to produce additional revenues.
"A substantial number of companies rely on these credits to support and subsidize their Alaska operations. Currently, in many cases the state is paying 55%‐65% of the cost of a project during the development phase, and up to 85% of exploration costs,"
"These large numbers result from 'stacking' multiple credits," the analysis says. "With the transition towards a system based mostly on operating loss credits, and the repeal of the expenditure credits that are stacked with those loss credits, the state's contribution towards many projects will be reduced roughly by half."
The House Resource Committee advanced a version of the bill late last month, and it now awaits work by additional committees in both chambers.
The Alaska Municipal League is not encouraged by developments in the capital so far. Kathie Wasserman, the group's executive director, said the legislature is reluctant to implement a broad-based tax and would prefer to delegate additional burdens to local governments.
"They don't want to confiscate the hard-earned fruits of the labor of the people of Alaska, Wasserman said. "We're going to be in a pickle."
While legislators appeared to have dropped a push to place additional responsibility for the Alaska Public Employees' Retirement System on municipalities, Wasserman said, they have not abandoned an effort to delegate to the localities some more responsibility for the Teachers' Retirement System. Wasserman said that the league believed the Anchorage School District would have an added burden of about $17 million under that scenario.
"That's no small change for a school district," Wasserman said.
Analysts said that the outcome of the legislative session will greatly impact how they view Alaska's credit quality going forward.
Gabriel Petek, a Standard & Poor's analyst, said S&P has been skeptical that such a sweeping range of reforms could take shape in a single legislative session.
The state is past the point of merely enacting a few small budgetary tweaks in other to get its house in order, he said.
"They need to do something more comprehensive," Petek said.
Marcy Block, a senior director at Fitch, said that the agency's negative watch on the state could be resolved by a favorable budget outcome.
"The watch is premised on reviewing them again when the budget is enacted," Block said. "How it ends up is pretty critical to us."
Block said that Fitch typically resolves rating watches within six months, meaning that there is some time built in so that the agency won't necessarily take action for some time after the end of the legislative session.
Block said that Fitch has been keeping an eye on the happenings in the capitol at Juneau, and that there has been significant back-and-forth between the independent governor and the Republican-dominated legislature.
The state is taking additional steps that won't be completed in this legislative session. Last month Walker signed an executive order directing the Alaska Housing Finance Corporation, Alaska Energy Authority and Alaska Industrial Development and Export Authority to find potential opportunities for efficiency and consolidation.
"Today's current environment of low oil prices and declining production necessitates a proactive response that signals to bond holders, business partners and Alaska families that our agencies are committed to doing our part to improve the economic health of the state," Bryan Butcher, AHFC chief executive officer and executive director said in a statement.
Walker has requested that the agencies provide him a report of recommendations ahead of the next legislative session.
