SAN FRANCISCO - Triple-A-rated Alaska has seen its general fund operating budget flip from large surpluses in recent years to a nearly $2 billion deficit this year, but Standard & Poor's still views the state's credit quality as very strong.
Alaska's structural deficit of $1.7 billion comes as oil production in the state continues to slide.
The state predicts its shortfall of unrestricted revenue relative to discretionary expenditures will persist for the next decade or more.
"The structural deficit reflects the state's dependence on taxes levied on petroleum production, which account for over 90% of general fund revenue," Standard & Poor's analysts said in a report released Tuesday. "Since peaking in 1988, production has declined by an average annual rate of roughly 5.5%."
At the same time, the state's 10-year forecast anticipates upward pressure on certain spending requirements, such as for Medicaid, which is expected to increase by 7.2% annually.
Gov. Sean Parnell is proposing to reduce the state spending baseline by almost 15% in fiscal 2015 and then hold it flat to reduce the gap to closer to $1 billion.
The administration believes its new tax regime will encourage more oil exploration and production, which could help shrink the expected fiscal gap, Standard & Poor's said. Voters will decide whether to adopt the proposed less progressive tax structure in an August referendum.
"Even if the longer-run deficit is tamed via higher production levels, the magnitude of the shortfall in this and the next several years would cause significant fiscal and rating pressure for most states," analysts said. "But Alaska's uncommonly large reserves mitigate the credit implications from the structural deficit at least through the two-year time frame of our outlook."
Standard & Poor's currently assigns a stable outlook to the state's ratings.
Alaska's reserve balances in fiscal 2014 equal almost 300% of Alaska's discretionary general fund expenditures, while the large operating shortfalls pertain only to the state's unrestricted revenue relative to its discretionary spending.
Unlike those of most states, Alaska's reserve balances can continue to grow even in years of general fund deficit because they are funded by restricted revenues, analysts said. During fiscal 2014, the state's restricted revenues dedicated to the reserves are on course to exceed its unrestricted general purpose revenue by 34%.
