In an analysis of the fiscal situation in Alaska, Standard & Poor’s wrote that in order to keep its credit rating, Alaska must reduce the budget deficit given the low price of oil.
“Although the rapid decline in oil prices exacerbates Alaska’s existing fiscal budget deficit, whether it will weaken the state’s credit quality will depend on the state’s budgetary response,” the credit rating service wrote. In most other cases, a $3.5 billion, equal to 57 percent of general fund expenditures, would “likely result in immediate negative rating consequences.” However, S&P is not changing its ratings yet because of the state’s large budget reserves, as well as the ability of the state to tap into the Permanent Fund earnings reserve balance, and the constitution budget reserve.
A decline in Alaska’s credit rating could cost the state hundreds of millions of dollars.
Here’s S&P’s analysis in full:
Alaska has built up layers of budgetary reserves that allow it to absorb one or two years of large operating deficits — just outside of our outlook time horizon –at its current rating level. But in order for it to avert credit quality deterioration, we believe the state must make material progress in reducing the deficit in its fiscal 2016 budget.
Although the rapid decline in oil prices exacerbates Alaska’s existing fiscal budget deficit, whether it will weaken the state’s credit quality will depend on the state’s budgetary response. For fiscal 2015, the state assumed oil prices would average $105.06 per barrel, giving rise to about 495,900 barrels per day of production on Alaska’s North Slope. Based on more recent price and production information, the state has revised its estimates to $76 per barrel and 509,500 barrels per day for fiscal 2015. The state’s assumptions regarding oil prices and production are integral to its budget condition because oil-related revenues made up 88% of its estimated revenue for the 2014 fiscal year and 79% of fiscal 2015. At enactment, the state’s budgeted general fund expenditures for fiscal 2015 exceeded its unrestricted revenues by $1.4 billion. Weaker oil prices and production resulted in an updated budget gap of $3.5 billion, equal to 57% of general fund expenditures. For most states, an operating deficit of this magnitude would likely result in immediate negative rating consequences. In Alaska’s case, however, extraordinarily large budget reserves effectively buy the state time to deal with its structural misalignment.
Even before the recent plunge in oil prices, the state’s unrestricted revenue structural deficit wasn’t sustainable indefinitely. But whereas its baseline fiscal forecast previously showed total budget reserves equal to 140% of expenditures after 10 years, now they would be depleted by 2023. However, we would likely begin taking rating action well in advance of that. In fact, the state’s ability to enact a budget for fiscal 2016 that makes material progress toward reducing the fiscal gap will be important to the future direction of its credit quality. Nevertheless, we are not changing the rating or outlook at this time because even with the large shortfall that has emerged, the state projects that fiscal 2015 will end with total budget reserves of $9.6 billion, or 157% of expenditures. In addition, the state’s permanent fund earnings reserve balance, which can be drawn upon with a majority vote of the legislature, is expected to have a balance of $4.66 billion at fiscal year end, bringing the state’s total reserves available for operations to 233% of expenditures. Finally, Alaska’s practice of prefunding major expenditures serves as another type of fiscal reserve. For instance, the fiscal 2015 budget prefunds the $1.2 billion fiscal 2016 education budget. Were the state to discontinue its prefunding activities, it would immediately generate a like amount of budgetary savings on a one-time basis.
The state’s large reserve balances also generate considerable annual revenue. Although the revenue from investment earnings is considered restricted, it could be made available for appropriation. In fiscal 2014, the state’s constitutional budget reserve (CBRF) returned approximately $1 billion in revenue that — with a three-fourths vote of the legislature — could be appropriated. Likewise, the state’s permanent fund generated $7.9 billion in investment revenue that could be appropriated with a majority vote of the legislature. And because most of the revenue is saved rather than spent, the state’s net asset position can increase even when there is a deficit of unrestricted revenue in the general fund. In fiscal 2014, for example, the state’s government wide net asset position increased to $82.1 billion in fiscal 2014, from $76 billion the prior year, despite a $1.9 billion unrestricted revenue shortfall relative to appropriations.
Projections for fiscal 2015 indicated reduced investment earnings of $270 million in the CBRF and $3.3 billion from the permanent fund. These amounts, if the legislature voted to make them available for appropriation, would approximately cover the revised budget gap estimate of $3.5 billion.
Under Standard & Poor’s policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
Standard & Poor’s Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world’s leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 23 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.
Charging in and making changes before you understand the problem is not the best idea even if you have studied the problem for a year and a half. Custer is a good example of how this can backfire on you, and he spent many years studying the problem. Unfortunately for him (and fortunately for Sitting Bull, Crazy Horse and the accompanying Cheyenne and Sioux), he was arrogant, egotistical and impetuous and got himself and all of his men killed due to his aggressive action. If he were a little smarter, he would have waited to engage until the odds were in his favor, but instead he chose to act quickly and decisively and it backfired on him.
I am very happy to see that this administration is taking their time and taking cautious action. I don’t think that it would be in the State’s best interest to arbitrarily axe projects and programs until the budget is balanced.
I wouldn’t expect much until the 2016 legislature convenes. I suspect that for the most part, Parnell’s budget will stay in place until the new administration has had a chance to study the projects and programs and determine which are necessary and which can be reduced or cut.
And just because the funds have been appropriated, doesn’t mean that they need to be spent. This administration could always keep the current budget and chose not to use the funds. That’s what I would do. Have the funds available if they are needed, but plan on not using them.
I agree with Lynn Willis’s perspective about an enlightened & civilized Open Government.
Bill & Byron might have to borrow a page from Alaska’s first commander of the Department of Alaska,
Jefferson C. Davis…
…he didn’t take any BS from anybody.
IMHO; Alaska is in no position to take any BS from any amateur podunk politician within it’s legislative ranks.
It’s time for all Alaskans to tow the UNITY line under Adult Supervision without any BS deceptions, secret meetings, confidential memos, or orchestrated theatrics.
click on my nick^ for the wikipedia article about Jef Davis.
If one runs for the office for a year and half, mainly on the platform of correcting the fiscal situation, it’s not unreasonable to expect there to be some sort of plan or idea for starting down that path upon winning the office. A friend of mine has described the Walker bunch as “the dog who finally caught the car and doesn’t know what to do with it.” I’d like to think he’s wrong, but time will tell.
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.
To create a sustainable budget we need to address the factors driving the deficit: spending and revenue. On spending, this means getting rid of dumb capital projects and coming up with a way to bend the cost curve on health care and Medicaid, continuing mike barnhill’s work on pensions, and finding better ways (eg put more of a burden on local governments that can afford it) to fund education – the Ketchikan lawsuit, which Walker supported, won’t help. Focusing on open meetings, state travel and junkets is just a distraction. It’s like john McCain railing against earmarks while ignoring the fact that entitlements and the military drive the federal deficit. State travel isn’t the problem here. The operating budget, which continues to grow, largely because of mandatory spending, is why we have massive deficits.
On the revenue side, we must diversify the revenue stream so we aren’t completely dependent on oil prices.
To: Lynn Willis – All of your points are valid; however, the fiscal crisis we are in demands immediate attention and action. Sure, we have to work out a budget for next year; however, we need to make immediate cuts and look for immediate savings. As you say, a billion is a thousand million dollars. Savings needs to be started today. This isn’t about blame or finger poonting. Unless Parnell or Walker control the cost of oil, it is neither there fault. I would like to point out that without SB 21 in place, we would be getting even LESS REVENUE and we’d be paying Exxon thru our nose for tax credits for Pt Thomson on top of things. The fiscal situation is exaspperated by a collapsing price of oil. All I’m saying is that without immediate action, like others have commented, only makes matters worst. Immediate action and solutions to slow the spend are necessary.
Yea! How long is it going to take for this administration to straighten out what the previous administration left behind? It’s been two weeks and they still don’t have the budget fixed. How long is it going to take the get this done?
RJR,
Raven makes a valid point. The apologists for the status quo are being a bit disingenuous. Walker needs some time to undo years of fiscal irresponsibility. The reason I voted against Parnell was his (and his like-thinking party members) strategy to both gain political favor, all while avoiding the recession facing the lower 48, by approving absolutely unsustainable budgets.. The fatal flaw in their plan was refusing to recognize that events external to Alaska often control our destiny. I do hope most of them now will simply stop using the term “fiscal conservative” when describing themselves.
Those in power deluded themselves into assuming that simply jiggering the tax rates to increase oil production and marketing North Slope gas would allow them to pull this off. Of course the current secretive legislative process which can render a legislator ineffective for even challenging the final budget made the situation even worse.
I experienced (the dare I say) “depression” in Alaska in the 1980’s when a similar collapse of oil prices turned off the revenue spigot. Walker’s immediate problem is the ripple effect of removing state dollars from the economy while having to deal with problems that still face us (after all that spending) like the public health and safety issues in many regions of the state, a solution to the problem of Alaskans who have no access to health insurance yet still remain eligible to obtain state funded health care, and the failure of many regions of the state to form local taxing authorities to lessen the fiscal burden on the state. I certainly do believe that there is quite a bit of “low hanging fruit” however, as I often mention, we now seek billions in adjustment and a billion dollars is a thousand million dollars. Events such as the Ketchikan law suit decision are now making the situation worse for the state and some pain is going to have to be expected and experienced soon. While the Governor submits the budget, the legislature has the responsibility of passing the final budget bill for action by he Governor and therein lies a big part of the problem yet my offer to provide the red pens and ruler still stands.
Walker has been governor for what 16 days and some of you act like he can wave some magic wand to fix every fiscal problem. Who got us here? Parnell! Don’t pretend that the alternative to Walker was better.
Lynn Willis is partially right. Red inlk and political courage will help considerably. But for the governor, waiting to be reactive is a breech of fiduciary responsibility. Walker/Mallott need to act boldly, decisively and NOW. Waiting is wasteful. I supported the Unity ticket brcause I felt Parnell was lame and failed to offer fiduciary leadership. By comparison at this point, I’m starting to wonder if I made a mistake.
The Walker administration’s approach to the fiscal crisis seems to be hoping that the public and state employees can come up with good suggestions that will bail us out. Would be nice to know if anyone in his group had a more extensive plan. It’s mildly terrifying if they don’t.
The solution to this crisis is to have a standing majority caucus that exempts itself from state open meeting laws and in which membership will be denied if any member of that caucus refuses to support the next bloated state budget. Also, let these legislators delay passing the budget until minutes before the end of the legislative session to allow maximum leverage by senior legislators for the necessary “horse trading” that insures critical items like the Kodiak Space Port and a duplicate Gas Line Project remain funded. Oh wait, isn’t that the system of government we have now that brought us this mess?
Please just ask me Governor Walker and I will purchase for you (at my own expense) a box of red ink pens , a plastic ruler, and a frame to mount the ticket stub that was used to send a lame duck legislator to a recent conference in Alabama. Hopefully I might then both equip you and motivate you to line item veto us back into reality while focusing on what expenditures truly benefit Alaskans. .
Where’s Walker? Sleeping maybe? Unaware of what’s going on? Is he aware of his powers of executive and administrative orders? Is he going to take action? Does he understand the word leadership?
And since Mallott is the co-governor or whatever they-re calling it, is he this lame too? Well, he hasn’t done anything either.
Maybe they’re planning on taking direction from Jim Whittaker (Governor’s Cheif-of-Staff) thinking that since he went into bankruptcy once that he understands fiscal crisis and has learned what to do and how to handle it. You think that could be it?
Yep, that must be it. Will this help you to sleep tonight?
This should be a wake up call. Unfortunately, it’s probably wake up call 439. The only thing more concerning than the looming fiscal crisis that we face is the very real crisis of political leadership and courage from our elected officials. I have not heard anything from the governor nor the House and Senate leadership that makes me feel like they even understand the gravity of our current fiscal situation. The private sector is acting with immediacy and concern. The legislature needs to meet with Walker and agree to take immediate and real action. Non-essential travel should be halted (like this will ever happen) and stupidity needs to cease. Just the other day this blog ran a story about the wasted of the Kodiak launch facility. That bleed should be stopped now. Governor Walker, you wanted the job. Now, do something with it and lead.