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.
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