Alaska’s Credit Rating Raised to AAA by Fitch
January 8, 2013, Anchorage, Alaska – The Department of Revenue today confirmed the State of Alaska’s bond rating has been upgraded once again to AAA, the highest grade, by Fitch Ratings. This is the third AAA rating in the state’s history, reflecting the state’s practice of maintaining exceptionally large reserves, extensive fiscal flexibility, and despite its deep financial resources, budgetary restraint.
Moody’s Investors Service upgraded Alaska to AAA in 2010 and Standard and Poor’s upgraded the state to AAA in 2012.
“With another Triple-A bond rating, more than $16 billion in budget reserves, and more than $44 billion in the Permanent Fund – Alaska is solid,” Governor Parnell said. “We’re paying down what has been defined as unfunded liabilities, and we’ve been named the sixth best-run state in the nation. Our responsible and responsive approach will keep Alaska on solid footing for years to come.”
Fitch Ratings attributed the upgrade to:
- Very Large Reserves: Alaska has set aside very large reserves for general fund operating needs, principally in the Constitutional Budget Reserve Fund (CBR) and Statutory Budget Reserve Fund. The state has used recent windfalls from high oil prices to repay past CBR draws and remains committed to maintaining sizable reserves, a key rating factor, given forecasted oil production decline. The state’s reserves provide multiple times coverage of its debt obligations.
- Conservative Financial Management: Conservative financial management is critical, given the state’s dependency on energy-related revenues and the volatility of energy prices and production. Fitch expects Alaska to prudently manage its reserve funds and promptly adjust its expenditures as needed. This is consistent with the Parnell administration’s historical practice.
- Economy and Finances Dependent on Natural Resources: While both natural resources and government have provided employment and income to Alaska’s small population, the volatility inherent in the natural resource industry is the state’s area of vulnerability. Petroleum-related revenue accounts for approximately 92 percent of unrestricted general fund revenue.
- Manageable Liability Position: Alaska’s debt burden is moderate. The state has prudently used available cash to fund its capital needs and outstanding obligations when cost-effective. Although the funded ratios of Alaska’s major statewide pension systems are weak, the state has undertaken significant pension reforms and closed its defined benefit plans to new employees in 2006. In addition, about half of the state’s other post-employment benefit obligations are pre-funded.
- Credit Profile: The upgrade of Alaska’s rating to AAA from AA+ reflects the state’s maintenance of substantial and growing reserve balances, and the continuation of conservative financial management practices at a time of strong revenue performance. State revenues are linked closely to oil production from the North Slope and global petroleum price trends, exposing the state to significant revenue volatility. Mitigating this risk, state fiscal practices are generally conservative, with the state dedicating a substantial share of oil-related revenue to reserves and employing long-range forecasting of revenues and expenses. Reserve balances have grown exponentially over the past several fiscal years, and Fitch believes the state is committed to keeping reserve levels high. Development of a natural gas pipeline from the North Slope, completion of which would help diversify state revenues, continues, with a settlement agreement reached with several large gas developers in March 2012. Debt practices are conservative, with limited issuance and average amortization. The economy remains stable. Although the state has potential exposure to federal employment cutbacks tied to budget pressures at the federal level, its revenue system limits its budget exposure.
Revenue Commissioner Bryan Butcher, who met with Fitch in December, said, “We spent quite a bit of time discussing our improved approach to the oil production forecast as part of the state’s more conservative fiscal management. We also talked to the rating agencies about the reasons why proposing changes to the oil tax structure to become more competitive makes sense now so a brighter future could be realized for Alaskans.”