State, municipalities face higher borrowing costs from falling credit ratings

Standard & Poor’s lowered Alaska’s credit rating this week. (Creative Commons photo by eflon)

Alaska’s credit was downgraded by two rating agencies in the past week. The state had the highest possible rating at the beginning of last year. But the Legislature failed to pass a plan to balance future state budgets for two straight years, which has contributed to the downgrades.

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Alaska’s credit rating comes into play when the state issues bonds to pay for infrastructure. For example, Alaska’s government can issue $100 million in bonds left from the $453.5 million voters approved in 2012.

If state issued those bonds before the rating downgrades that began in January 2016, it would cost $250,000 to $300,000 less per year than now. Over the 20-year life of the bond, that would add up to $5 million to $6 million.

Those estimates are by Deven Mitchell, the state’s debt manager. He’s in charge of trying to protect the credit rating.

“It’s akin to a credit score that you might see deteriorating due to credit issues that you might have experienced in your personal life, and a correlated increase in cost for purchase of consumer goods on credit or a car or a home loan,” Mitchell said.

Moody’s downgraded Alaska’s credit rating Aa2 to Aa3 last week, while Standard & Poor’s downgraded it from AA+ to AA on Tuesday.

Mitchell said the state doesn’t plan on issuing any bonds this year. But if the credit rating remains lower when it does, the cost will add up.

“If you could keep $5 million in your pocket rather than just giving it to somebody because of a perceived risk, you’d do so,” Mitchell said.

The credit rating doesn’t just affect the state. There are other organizations that issue bonds whose ratings depend on the state’s such as the Alaska Energy Authority and the Alaska Municipal Bond Bank Authority. Borough and city governments frequently rely on the bond bank.

Mitchell said this could lead to higher local taxes.

“You can see directly, ‘Well, that money would either not needed to have been collected, or would have been available for another purpose if the interest expense on our $20 million project was less, because the state had a better credit rating,’” Mitchell said.

In the case of the City and Borough of Juneau, the state’s worsening credit outlook may cause the municipal government to issue bonds on its own in the future instead of using the bond bank. While Juneau’s rating used to be lower than the state’s, they’re now the same.

Juneau Finance Director Bob Bartholomew said the falling ratings are one of many reasons why it’s important for the Legislature to resolve its differences over a plan to balance the state’s budget.

“We may be headed towards having a higher credit rating than the bond bank, and in that case, it’s still more expensive for us than what it was prior to the downgrade,” Bartholomew said.

Mitchell said the $60 billion Alaska Permanent Fund traditionally didn’t always help the state’s credit rating. That was despite the fact that the Legislature could tap the fund to pay its bills if it needed to.

“I’ve had rating analysts tell me historically that there’s no way the state will ever spend money out of the Permanent Fund for governmental services,” Mitchell said.

But Gov. Bill Walker’s decision to veto Permanent Fund dividend money last year – and the Legislature providing less than the amount laid out by state law this year – may help Alaska’s credit ratings in the future. It was a signal that the fund could be used for more than just PFDs.

“It got us closer to a point that I believe we’re going to be able to start receiving full credit for the Permanent Fund in our credit analysis, because in my view, we’re not receiving that credit at this point,” Mitchell said.

But all is not rosy in the ratings’ outlook. The state has at most one year left in the Constitutional Budget Reserve Fund, a piggy bank that’s covered annual deficits up until now.

“It could be that we have another year next year where it’s too difficult to reach agreement between the two different positions that exist within the Legislature and we wind up using the CBRF again one last time,” Mitchell said, adding, “then everybody will know the next year something will have to change.”

Or Alaska could face its third straight summer with lower credit ratings.