Alaska's bond rating falls to AA-minus
Alaska's years-long recession, and the failure of state leaders to adequately address it, prompted Fitch Ratings to cut the state's issuer default bond rating to AA-minus.
Fitch revealed the one-notch downgrade Thursday while assigning a stable outlook.
"While Alaska maintains the broad expense-cutting ability common to most U.S. states, the administration's intention to provide for a full statutory dividend payment during a period of continued revenue sluggishness meaningfully reduces its operating flexibility," Fitch wrote.
The downgrade to AA-minus from AA affects roughly $724 million in general obligation bonds. Fitch also dropped the rating to A-plus from AA-minus on $1.1 billion in state appropriation bonds, $996 million in Alaska Municipal Bond Bank Authority 2005 resolution bonds, $4 million in bond bank 2010 resolution bonds and $133 million in bond bank 2016 resolution bonds.
The state is suffering through what state economists described as a three-and-half-year recession brought on by a drop in oil prices, even as the rest of the country has benefited from the longest economic expansion in U.S. history. The state has endured a bruising budget process that pitted its weakening revenue position against a governor who wanted to increase Permanent Fund handouts to state residents, resulting in budget cuts.
Alaska had triple-A ratings prior to 2016. The resulting budget tumult led Moody's Investors Service to assign a negative outlook to the state's Aa3 rating in July. S&P Global Ratings has an AA rating for the state.
"Multiple years of revenue weakness combined with this objective has resulted in consequential cuts to core services in fiscal 2020 that the state intends to replicate in the next budget and that will limit the state's flexibility when confronted with a future economic downturn," Fitch wrote.
Unlike some state economists, Fitch tracks the state’s revenue and economic weakness back to 2013 saying it was exacerbated by the extended effects of sharply lower crude oil prices beginning in 2014. The state has begun to see signs of an economic recovery with year-over-year employment increases in each month of 2019, Fitch wrote.
Nearly 24% of the state’s gross domestic product comes directly from natural resources like the production of crude oil, natural gas deposits and mining, Fitch said. That percentage balloons when considering the multiplier effect from these turbulent sectors. Other sectors include its fishing industry and tourism.
The state's GDP has declined in five of the last six years through 2018, hurt by a deterioration in crude oil prices that began in late 2014, reducing related employment and pushing Alaska's unemployment rate hight than the nation's, Fitch analysts wrote.
Oil prices have improved since bottoming at $26.23/Alaska North Slope West Coast barrel during fiscal 2016 to the current $60.88/ANS barrel. They remain far below the $116/ANS barrel level reached in fiscal 2013.