A major credit rating agency has issued a negative outlook for Alaska and warned the state needs to “enact measures in fiscal 2022 that produce sustainable fiscal balance.”
Fitch Ratings said that Alaska's “steady draws on its reserves to fund operations in recent years leave it in a weaker fiscal position than most states.”
“The negative outlook reflects the direction the rating is likely to move should the state fail to enact measures in fiscal 2022 that produce sustainable fiscal balance,” Fitch said in its "rating action commentary."
Fitch said that Alaska’s history of “strong management of its financial operations and extraordinary reserve balances have offset revenue volatility.”
“However, the state's difficulty in achieving structural balance has led to consistent draws on accessible reserves, resulting in limited options and notably reduced resiliency.”
Fitch discussed the impact of the state issuing Permanent Fund dividends during “revenue sluggishness.”
The credit rating agency stated that “Alaska maintains the broad expense-cutting ability common to most U.S. states, but its commitment to making dividend payments during periods of revenue sluggishness meaningfully reduces the state's operating flexibility.”
The credit rating agency noted that the Alaska economy is largely based on its "abundant natural resources through the production of crude oil and natural gas, mining, fishing and tourism."
Fitch identified broad challenges for Alaska that include "volatility in the gas and oil market," growing interest in decarbonization and clean energy, federal policy on public land use and the state’s declining population trend since 2017.
The credit rating agency affirmed the following state of Alaska ratings:
• Alaska’s Issuer Default Rating (IDR) at A+;
• General obligation (GO) bonds at A+;
• State appropriation bonds at A; and
• Alaska Municipal Bond Bank Authority 2005 and 2016 resolution bonds at A.
A state's rating is typically reviewed and restated quarterly. The three main credit rating agencies are Moody's, Standard and Poor's, and Fitch Ratings.
Factors that may affect future ratings
Fitch identified factors that could lead to a rating upgrade for Alaska.
“The Rating Outlook could return to stable if the state advances financial policies in fiscal 2022 that promote stable financial performance and make progress toward improved financial resiliency,’’ the agency concluded
Factors that could lead to a negative rating or downgrade include the failure by Alaska “to enact measures that make substantial progress toward a structurally balanced budget, including through tax policy changes or expenditure reductions.”
Fitch warned about making “significant draws on the state's accessible reserves beyond Fitch's current expectations to balance financial operations or to fund other priorities.”
Contact political reporter Linda F. Hersey at 459-7575 or follow her at twitter.com/FDNMpolitics.