In a comment on the story about Standard & Poor’s warning Alaska to get its fiscal house in order or risk a credit-rating downgrade, reader Garand Fellow argues that not only are the credit ratings agencies urging Gov. Bill Walker to make tough choices, Alaskans have given him buy-in to do so also, if he chooses to go that route. If he doesn’t? The agencies, which are watching Walker closely, will take note. “If there is a credit rating downgrade it will come not from lowered oil prices but from lowered expectations of this still new governor,” Garand writes.
He/she drives the point home: “This is a strong governor state. The governor can take action without having to convince an elected AG and an elected state treasurer. An Alaska governor who would rather not lead has no place to hide; no one else to blame.”
The credit rating agencies are not surprised that a credit has challenges, and even a triple-A credit is expected to have them. But there are additional expectations. Cash is king, but the agencies expect to see more leadership, and decisive leadership, out of say a triple-A credit than they might out of a double-A credit. They expect no games; no hide-the-peanut, no razzle-dazzle, no Hail Mary action. They expect quick, organized, decisive action explained very well to Alaskans and to the agencies. I cannot imagine that anything would be a higher priority right now for Governor Walker.
What does this mean? It means that Governor Walker must bring agreement early in the legislative session to some plan that matches revenues and expenses before the CBR and SBR are exhausted. Counting on higher oil prices coming to the rescue, selling bonds (including pension obligation bonds), and making proposals that the legislature is unlikely to accept would not be appropriate for even a single-A credit (although downgrades are done in small increments over time, otherwise the agencies look like they may not have been paying attention).
The best and arguably the only tool Governor Walker has for the remaining half of FY2015 and for FY2016 is reducing expenditures. Programs need to be furloughed or eliminated. Again, from a triple-A credit the agencies expect to see a high level of leadership, and they understand Alaska very well. This is a strong governor state. The governor can take action without having to convince an elected AG and an elected state treasurer. An Alaska governor who would rather not lead has no place to hide; no one else to blame.
This rating agency action, and these outlook changes (Moodys lowered their outlook, and here S&P has done that without doing that) and concerns formally stated are both actions and warnings, should not be ignored. However, the dollar cost is minimal if no new debt is sold. At the same time, a credit rating downgrade would markedly reduce prospects for the state having an equity interest in large new enterprise projects.
The Walker administration has lots of positive information to give the agencies. Alaskans recognized the situation and turned down Ballot Measure 1 last August. Governor Walker ran on quickly balancing the budget which was at that time $7 million per day in the hole and now is $12 million per day in the hole – so he can say that Alaskans expect him to reduce spending right now. In fact, we do expect him to reduce spending right now, not waiting for the legislature and not deferring to the legislature. Governor Walker has the cover to take action.
Where the agencies depart from Alaskans is that the agencies would applaud Governor Walker for putting the Permanent Fund earnings reserve in his FY2016 budget and ending the PFD. Governor Walker needs to reduce real spending and end real programs in order to gain sufficient buy-in from Alaskans but the agencies would buy into that right now. Still, the agencies expect to see real reductions in per capita state spending because state spending is so high in Alaska.
Governor Walker said time and again during the campaign that he is up to this job. While Alaska media have mostly failed to do so, the credit rating agencies have now put Governor Walker and Alaska on notice that it’s time to end the talking and take action. If there is a credit rating downgrade it will come not from lowered oil prices but from lowered expectations of this still new governor. You can take that to the bank.