Credit ratings agency Standard & Poor’s released a statement on May 19 warning the Legislature once again that a failure to address the $4 billion budget gap may further lower Alaska’s credit rating.
The Legislature adjourned on May 18 at the end of an extended, 121-day session without passing a budget for the upcoming fiscal year, or any of several fiscal changes concerning the Permanent Fund or oil and gas tax credits.
On May 19, Gov. Bill Walker issued a call for a special session to begin on May 23. The Legislature will have until July 1, the start of fiscal year 2017, to pass a budget and prevent a government shutdown.
S&P had supported Walker’s plan to restructure the Permanent Fund and install an income tax in January, but acknowledged the political difficulty of both ideas. All the same, S&P said the Legislature has to act or face both a government shutdown and worsened credit ratings.
“The politics of reaching an agreement on some combination of fiscal reforms that would stabilize the state’s budget outlook is proving every bit as difficult as we anticipated in January,” the statement reads. “If lawmakers cannot reach an agreement on fiscal reforms that move the state toward fiscal alignment in the special session, we expect the negative pressure on the state’s credit rating could intensify.”
S&P lowered Alaska’s general obligation debt rating from AAA to AA+ on Jan. 5, with a continued negative outlook in light of the $4.1 billion budget deficit.
The ratings agency said at the time it would have to lower Alaska’s rating again if it did not renovate the state’s financial structure.
S&P maintains that the state cannot continue to operate at its current spending level without making substantial changes to the Permanent Fund dividend and finding new revenue sources. The report specifically mentions the $775 million the state will pay this year for the oil and gas tax credit
program and the possibility of an income tax.
“In order to materially close the structural budget gap, any such plan ultimately relies on a reduction to the state’s dividend payments paid to residents,” reads the statement. “Furthermore, as prodigious as the state’s base of investment assets is, it most likely cannot sustainably generate enough revenue from investments to support the current level of general fund expenditures.”
It is largely believed that the roughly $52 billion Permanent Fund could support an annual net draw on investment earnings of about $2.5 billion per year.
S&P has noted that Alaska has significant savings in the Constitutional Budget Reserve and the Permanent Fund earnings accounts, but insists the state’s fiscal structure needs to change before spending depletes them by the end of the decade.
“Without a change to the state’s fiscal structure, however, the forecast shows reserve balances declining each year,” the statement reads. “By fiscal 2020 the combined reserve balances would equal $2.3 billion, or 47 percent of expenditures under a status-quo fiscal structure according to the DOR forecast, assuming oil prices average $54.48 per barrel that year.”
Revenue forecasts say that 57 percent of Alaska’s unrestricted revenue will come from oil in fiscal year 2017, assuming 520,000 barrels of production at an average price per barrel of $38.89.
In a follow-up report in January, Standard and Poor’s Rating Services examined what makes some oil states’ futures look bleaker than others. The hardest-hit states forecasted oil prices too optimistically, tied too much state income to oil revenues, or didn’t save enough from the good old days when prices were high and state coffers were fat.
S&P analyzed eight oil-producing states: Alaska, Louisiana, Montana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming. Of the eight, S&P rated Alaska, Louisiana, and New Mexico as having negative credit outlooks.
DJ Summers is a reporter for the Alaska Journal of Commerce. He can be reached at daniel.summers@alaskajournal.com.
