What does a downgraded credit rating mean for Alaska?

I realized when I posted Garand Fellow’s piece about Alaska’s credit rating being on the verge of being downgraded by two of the three credit rating services, that although it sounds really bad, I didn’t fully understand what that meant for Alaska.

First a little background: There are three credit ratings services, Standard & Poor’s, Fitch, and Moody’s. Alaska has a AAA rating from all of them, which is the highest rating and means that the state has “extremely strong capacity to meet financial commitments.” In 2013, it was one of 13 states to have that rating. (At an A-, Illinois had the lowest rank among states.)

If the state’s rating is downgraded, it means that we might have to pay a higher interest rate on future state-backed bonds. But given that ratings agencies are cautious, and change ratings in slow increments, it probably wouldn’t have a huge effect on the state if it were downgraded, said Department of Revenue Deputy Commissioner Jerry Burnett, adding that those ratings are very important and DOR is taking it very seriously.

If the state is downgraded, which is a big if, “The sky is not going to fall…We’d have to be downgraded to junk bond ratings for that to happen and that’s not going to happen under any plausible scenario,” Burnett said.

Basically, he explained that we’d have to pay an incremental increase in future state-backed bonds, perhaps as low as .1 percent. That’s not nothing, but it won’t break the bank.

Increased interest rates would only be very costly for the state if the state was going to borrow huge money, like if it does so if it wants to have equity in a natural gas pipeline, which he Burnett declined to discuss because he was unsure of the exact details. But what I’m hearing is that a lot needs to be done before the state has to put large sums of money towards the project, and a lot could change between now and then.

For now, Burnett and others in DOR are meeting with credit ratings services to assure them that despite what many of us might think, Alaska’s leaders are actually fiscally prudent and the savings that it has amassed has put in on solid ground.

He pointed out that we have net financial assets of over $70 billion, which is pretty good for a state with only 750,000 or so people in it.

“We think the state is in really solid condition,” Burnett said.

Contact Amanda Coyne at amandamcoyne@yahoo.com


13 thoughts on “What does a downgraded credit rating mean for Alaska?

  1. arctic urbanophile

    Amanda, wasn’t that house beyond amazing? I hope you had time to go ‘explore’ and saw the pool.

  2. joe blow

    Oil prices have bottomed out and already headed back up. Within a year we’ll be back at $80, back to $100 in 18 months.

    Big Oil companies always play the long game. The sky is not falling, Everything is still in front of us.

  3. Garand Fellow

    There has not been a credit downgrade. However, the change in outlook and even a negative review will cost the state and municipalities in the form of higher interest rates on any new debt sold. The most direct hit will be to state general fund debt such as general obligation debt (approved by voters as required by the state Constitution) and lease debt (such as the state debt sold by the Mat-Su Borough to pay for construction of the Goose Creek prison, which paid the high price of avoiding the voters but is an equivalent obligation to general obligation bonds).

    What a negative credit statement or action does is make the security worth less. It is that simple. Outstanding bonds held by investors, including widows and orphans, are today worth less than they were last month because of what Moody’s and S&P have said. The state is failing to protect the security to the degree likely hoped by owners of Alaska bonds.

    Possibly it is worth restating that a credit downgrade, which will come if the state doesn’t take sufficient remedial action soon, would not be a statement about oil prices and the market value of oil reserves but instead would be an expression of disappointment in action taken or not taken by Governor Walker at this critical time. The legislature is immune from blame until or unless Governor Walker exhausts the considerable power, leverage and toolbox he has and is thwarted by the legislature in trying to balance annual expenditures with forecast ongoing revenues. What the credit rating agencies abhor is meeting ongoing regular expenditures with one-time sources of cash (such as reducing the balances of the SBR and the CBR, whereas using the earnings of the SBR and the CBR would be OK), and planning to do so (as opposed to doing so due to unforecast changes in revenues) is even worse.

    This is not complicated. If your 19 year-old child has lots of student loan debt, is able to obtain no higher-paying job at the moment than delivering pizza, and leases a new BMW you would tend to assign that child of yours a negative credit outlook. You might even downgrade your child’s credit rating. You would be disappointed in your child perhaps.

    The cost of a credit downgrade as measured by interest rate (in basis points, 100 BPs equals one percent of interest rate) would be very small but the cost to a large project such as a prospective gas line would be huge with respect to loss of bargaining power and face. In fact, a credit downgrade would at a minimum postpone financing and constructing a gas line by some number of years. The state’s side of the bargaining table would have its legs sawed down by 2 feet and the oil producers, on the other side of the table, would be looking down on the administration even much more than is the case today. For a year or three after even the smallest credit downgrade a Japanese or Chinese utility interested in Alaska LNG would feel compelled to hold its nose while negotiating with the state. Potential Asian gas customers would see it the same way that Miss Manners may have seen the situation when not long ago the daughter of a sitting Alaska governor had a child out of wedlock. Asians appear to me to be different from Alaskans with respect to credit, and possibly to linking credit and honor.

    I won’t say this but someone might say that if low oil prices hold for very long then Governor Walker is going to have to balance the budget anyway, that is match expenditures with ongoing revenues, so he might as well do it now and preserve the current, high state credit ratings. That is he can preserve the higher ratings today or he can wait and preserve lower ratings later. The impact on any potential large projects borders on the profound, so someone could say that every Alaskan should be urging Governor Walker to balance the budget very very soon.

  4. Aurora

    I understand a credit down grading means that the state will borrow funds at a highr rate. Will this be just G.O. Bonds or revenue bonds as well? I am curious because I think that I’ve read that the pipeline will be financed with revenue bonds and not general obligation bonds. In other words, is the rate for revenuie bonds based on the state’s credit worthiness or the project’s credit worthiness?

  5. Jamie kenworthy

    Burnett’s comments reflect more the thinking of the last administration which he was part of than the current one.
    Below-$60/bbl oil has just started to work its way through the political system and economy. Assume a gas line stays the priority of the Walker administration. The difference between financing of a long bond at AA instead of AAA is almost 1/2 %; sounds like a little, but over 35 years the difference in financing the state’s $6-8 billion stake in the gas line is a billion dollars in extra interest costs over the bond’s life. And both the state and municipalities and state agencies will start paying more for all debt issues.

  6. Crude is Rude, Gas is Groovy

    Garand, I’m not too worried what S&P thinks,
    because Alaskans really don’t need to borrow from external banks,
    if we are quick & nimble to pick up all the low hanging fruit all around us.
    The low hanging fruit was blown down as windfalls in the last autumn storm and is hidden from view now buried in the snow,
    we have all winter to make jelly & jam & pies out it if we act quickly.

    Money is a rubber yardstick,
    and Time is Money, and a whole lot more.

    Alaskans are like the mountain climber seen descending Ruth Glacier…
    When somebody noticed his boot laces were tied together,
    he said: “No wonder I’m so tired !!”

  7. Garand Fellow

    Ms. Coyne, When S&P says, “we believe the state must make material progress in reducing the deficit in its fiscal 2016 budget,” that is not coded language. It is a clear, direct statement as to what Governor Walker must do to prevent a near term credit downgrade. S&P will tell the state and likely has told the state whether material progress is a 5% budget reduction, a 16% budget reduction, or something greater for FY2016.

    A very safe bet would be that given the $3 billion annual deficit at current oil prices and production a 5% budget reduction would not be material for any of the 3 credit rating agencies. The agencies will be watching for Governor Walker’s budget. And this is all happening on Governor Walker’s watch.

  8. Crude is Rude, Gas is Groovy

    LOL ++ ROFLMAO !!!!!!!!

    IMHO: SB21 = BS21

    I’m old enough to remember what the North Slope looked like before 1968..

    SB21 was pushed as a faith based initiative to Alaska’s faithful TAPS worshippers.
    TAPS is just a big ugly messy dilbit crudepipe on stilts,
    it was an engineering mistake that never worked as designed.
    TAPS is a big box of booboos & bandaids.
    The entire petrochemical industry is similar to the nuke industry,
    it’s still retarded, reckless, and annoyingly slow to mature.
    TAPS should have been a gasline from the beginning in 1969.
    Gas is a superior feedstock to crudeoil.
    We now know that it’s much more efficient to make products like gasoline, and polyolefins from methane than using crude.
    ……..click on my nick^ for a clue.
    Saudi Aramco invested $30mil in Siluria in effort to capture this technology,
    they probably already know that crude can be efficiently produced & gasified into light-alkanes even after all of the associated-gas has been depressurized & used first.

    Much of what AOGCC has been taught in The Church of Petroleum is pure mythology

    Worldwide, 1000 years of hydrocarbons has been wasted because it has been produced & used as crude without allowing the carbon to carry as much hydrogen along as possible.
    Not only BigOil, but all of our transportation and architectural industries are slow to mature without enough unified foresight.

    for a little fun, goog: graphene hydrogen

    …this is now the 21stCentury, the century when Foresight becomes easier than Hindsight 🙂

  9. Jon K

    The love affair with crude has driven our economy, paid for vital state services, and was instrumental in putting $70 billion in the bank. Oil discoveries on the Kenai also played a role in helping to convince congress that we had the resources to be self sufficient and drove the conversion to gas in Anchorage while the discovery at Prudhoe put a ton of money into the state’s coffers at a time when we had very little.

  10. Crude is Rude, Gas is Groovy

    IMHO; The AGDC/AKLNG proposal should be canned,
    put in a time capsule and stored for 40 years,
    then opened for the amusement of our grandkids.

    No matter the tippy bond rating or the hard won capital reserve AK has in comparison to most other states drowning in red-ink…
    …The AGDC/AKLNG proposal is fatally flawed in many ways,
    and too monolithic & top heavy.
    The AGDC/AKLNG proposal attempts to pack 10lbs of poop into a 5lb bag,
    and puts all the eggs in one basket.

    Many of us plead for a much more diversified state economy,
    but why are so many of us so very gullible when it comes to allowing all of AK’s capital to be put at risk building a dubious whopper megaproject that as proposed by AGDC the state will not have majority control of ??

    For just one example of many flaws…
    Nobody in A-rage has yet to answer my concern about this glaring bottleneck;
    If you build a 4bcfd LNG export facility anywhere in AK how do you expect all this LNG will be shipped to market ??…
    …The world fleet of LNG tankerships is already booked solid.
    OK, so we break our bank building this platinum plated gaspipe,
    then we wait for our asian market to build the LNG-tankerships,
    this puts the pricing leverage into the hands of the buyers and not the sellers…
    …this is stupid not only economically, but geopolitically.
    I personally have no animosity toward our traditionally adversarial heads of state,
    but if you want to bump Vladimir Putin off,
    he will surely die laughing at the prospect of Alaska’s blunders.

    goog: power of siberia

    Alaska can be making it’s own Flexpipe for very little CAPEX risk..
    and flexpipe will begin moving the gas in both directions quickly,
    with scalable flexibility bringing energy to the vital economic core of Alaska.

    With a little creativity AKRR can replace TAPS as the economic backbone of AK.
    …yeah, after 40years of a love affair with monolithic CRUDE it’s kinda hard to visualize a diversified gas-infrastructure.

    The Best Market for Alaska’s GAS is: ALASKA

  11. Lynn Willis

    That 70 Billion in the Permanent Fund is not intended to be equity for state debt if that is what I am hearing from Mr. Burnett and like thinkers. That money is intended for future Alaskans not yet born.
    Also, I take no comfort in Mr. Burnett’s “years away” dismissal of the costs facing us as equity partners in the AKLNG pipe line project. According to testimony provided by the Parnell Administration, immediately upon passage of SB 138 (which authorized our participation in AKLNG with subsidies to the parallel AGDC/ASAP project) we faced a $35 to $43 million obligation to fund “Pre-Feed” during the next 12-18 months with the caveat that if the project proceeds no further we are obligated to TransCanda for another $53-$67 million plus a payment to them of 7.1% for Allowance for Funds Used During Construction (AFUDC). Now if we proceed to “Feed” after another 2-3 years (have we reached “years away” yet?) the “State/ AGDC Subsidiary Share” is $145-$180 million and if we fail to proceed further we owe TransCanda $183- $337 million plus that 7.1% AFUDC. Is this “pre-feed” and “feed” expenditure enough money to concern ourselves before we face the obligations we must meet if actual construction begins?
    I am not convinced the seriousness of our fiscal situation has registered with our legislators or perhaps they simply share Mr. Burnett’s opinion that we actually have $70 billion available to spend if “push comes to shove”. Today I read an appraisal of our situation given by a State Senator in the ADN article regarding the future of the Susitna Dam: “Meanwhile she said, the plunge in oil prices is a recent phenomenon and one the state will survive as it has done before”. Well I am sure the Sun will continue to rise and the rivers will break up each spring but I am also certain I do not want to simply “survive” another crash of the state economy because that last “survival” impacted me financially for the rest of my life.
    Is her statement a denial of reality or does she think this actually is no big deal and we can continue to do business as usual? Perhaps we should now take advantage of more accessible “weed” and change the Alaska State Song from “Eight Stars of Gold” to “Don’t Worry Be Happy”.

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