While many muni credits have benefitted from the precipitous drop in oil prices, the impact has not been uniform. Alaska, which is more dependent on petroleum derived revenues than any other state, had its AAA general obligation bond rating downgraded one notch to AA+ by Standard & Poor’s last week. Before the downgrade, Alaska had top ratings, Aaa/AAA/AAA, from Moody’s, S&P and Fitch. Moody’s and Fitch have maintained their top ratings, but Moody’s has a negative outlook due to the potential impact of lower oil revenues. After its downgrade, S&P maintained a negative outlook on the AA+ rating.
Despite its concentrated tax base and dependence on volatile petroleum revenues, Alaska had garnered its top ratings because it was able to accumulate substantial reserves when oil prices were elevated. By the end of FY 2014, the state had built up approximately $17.6 billion of reserves, nearly three times its annual operating budget. However, 75% of its revenue was generated from petroleum revenues. As oil prices declined, those revenues fell by 50%, much more than the state had estimated in its 2015 budget, and it was forced to start tapping into those reserves. S&P downgraded Alaska because its budget gap continues to grow while petroleum revenues decline.
Even with S&P’s downgrade, Alaska still enjoys very high ratings due to the financial cushion furnished by its large oil reserves. However, Alaska’s governor and legislative leaders acknowledge that they must revise the state’s financial structure to maintain its high grade credit quality. In addition to expenditure reductions, the state has considered levying a personal income tax, a tax residents have not seen in 35 years. A consensus for the FY ’17 budget may be difficult to achieve given the low level of taxes and high level of service to which Alaskans have grown accustomed.
Sources: Alaska Department of Revenue, Fitch Ratings, Moody’s, Standard & Poor’s