SAN FRANCISCO - How declining oil prices impact Alaska's credit quality will depend on the state's budgetary response, according to Standard & Poor's.
Alaska's state government, rated AAA with a stable outlook, is almost entirely dependent on oil tax revenue.
"Alaska has built up layers of budgetary reserves that allow it to absorb one or two years of large operating deficits—just outside of our outlook time horizon—at its current rating level," analysts Gabriel Petek and David Hitchcock said in a report Thursday. "But in order for it to avert credit quality deterioration, we believe the state must make material progress in reducing the deficit in its fiscal 2016 budget."
The report follows the state's recent decision to revise its budget estimates for oil prices to $76 per barrel from $106.06 per barrel for fiscal 2015, based on recent price and production information. Benchmark crude oil prices were below $60 a barrel Wednesday, according to Bloomberg.
Oil-related revenues make up 88% of Alaska's estimated revenue for the 2014 fiscal year, and 79% of fiscal 2015.
The state's budgeted general fund expenditures for fiscal 2015 exceeded its unrestricted revenues by $1.4 billion, and the revised oil price estimates resulted in an updated budget gap of $3.5 billion.
"For most states, an operating deficit of this magnitude would likely result in immediate negative rating consequences," analysts said. "In Alaska's case, however, extraordinarily large budget reserves effectively buy the state time to deal with its structural misalignment."
Even before the plunge in oil prices, Alaska's unrestricted revenue structural deficit wasn't sustainable indefinitely, analysts said. The state's baseline fiscal forecast previously showed total budget reserves equal to 140% of expenditures after ten years; at current trends they would be depleted by 2023.
"Nevertheless, we are not changing the rating or outlook at this time because even with the large shortfall that has emerged, the state projects that fiscal 2015 will end with total budget reserves of $9.6 billion, or 157% of expenditures," the S&P report said.
Moody's Investors Service on Tuesday revised its outlook on Alaska's Aaa to negative from stable.
Fitch Ratings also assigns Alaska a AAA rating. The agency said in a recent report that the decline in oil prices would not have any immediate impact on the credit rating.
