Rating agencies warn Alaska: We’re watching you

16 05 24 Capitol Construction
Construction on the Capitol building in Juneau on May 24, 2016. (Photo by Rachel Waldholz/Alaska’s Energy Desk)

In his quest to remake Alaska’s finances, Gov. Bill Walker has found a set of perhaps unexpected allies.

They don’t live in Alaska – some of them have never been to Alaska – but they have the power to give Alaska lawmakers an ulcer every time they speak.

They are the credit rating agencies.

Like an individual’s credit score, Alaska’s credit rating is our calling card in the world of finance. Want to refinance our pension obligations or borrow to build a giant natural gas pipeline? Alaska’s credit rating determines whether the state can access that money and how much it will cost.

This month, the last of the big three agencies revoked Alaska’s top-notch credit rating, citing the state’s massive budget gap.

The downgrades mean it will be more expensive for the state and many Alaska communities to borrow.

But Gov. Walker said the downgrade is about more than just money.

“It sends a message across the country that there’s something wrong with Alaska, there’s something going on in Alaska,” he told reporters after Fitch Ratings announced its downgrade on June 14.  “I’m concerned it would have a chilling effect on investment in our state.”

The three major rating agencies have names out of a Harry Potter novel: Moody’s, Fitch, Standard & Poor’s. But who are the men and women behind the curtain? We called up to find out.

Gabe Petek is the lead Alaska analyst at Standard & Poor’s. He’s 44 and based in San Francisco. He’s been working on Alaska’s credit rating, on and off, for about a decade.

You can think of Petek as Alaska’s defense attorney — or prosecutor — within S&P. He tracks developments in the state through news reports and financial filings, then makes the case to an S&P credit committee for how much of a risk we are or aren’t. The committee then assigns a rating.

“We don’t claim that we’re the Good Housekeeping seal of approval here,” he said. “We’re just providing an opinion on the creditworthiness of the borrower.”

And lately, that opinion has been bearish. S&P was the first agency to downgrade Alaska back in January, knocking the state down a notch, from AAA to AA+.

Which, to be clear, is still pretty good. Alaska is better rated than, say, Colorado’s AA, similar to New York or Minnesota’s AA+, but apparently not as rock-solid as Texas’ AAA.

S&P has made clear in its public statements that unless lawmakers can find a long-term budget solution, that rating is likely to drop.

As for what that solution should look like, Petek claims it’s not for him to say.

“I think sometimes people maybe read into it that way, but that’s really not what we’re about,” he said.  “We’re not trying to put our thumb on the scale for any specific policy.”

That said, S&P has been pretty explicit about what would change their minds.

This spring, they issued no fewer than five reports tracking the state and lawmakers’ progress.

Their main conclusion: The state can’t cut or tax its way out of the current budget hole. The only way to close the gap and retain Alaska’s current credit rating is something like the governor’s plan to restructure the Permanent Fund and use the earnings to fund state government.

“We can do the math as well as anyone,” Petek said. “If there’s a $4 billion gap, and a $5 billion budget, it’s pretty tough to make all of those adjustments just through spending cuts or through tax increases.”

“I do think that Gabe’s had his finger on the pulse more than some of the other analysts,” said Deven Mitchell. Mitchell is the state debt manager, essentially the steward of Alaska’s financial reputation for the last 18 years.

He is not enjoying the current moment. It took 50 years for the state to work its way up to a AAA rating. According to Mitchell, the state’s first credit rating was Baa1, from Moody’s Investors Service in 1961. Moody’s uses a slightly different rating scale than S&P – Alaska’s current Moody’s rating is Aa1.

“It’s a very long and hard progression to obtain credit rating increases,” Mitchell said. “To have a diminishment of that credit rating at this point is disheartening, because I recognize that it’s going to be a difficult course to reverse.”

With interest rates at historic lows, the issue isn’t so much what it will cost the state in the short term, Mitchell said. The difference between borrowing costs for a AAA rating or a AA+ rating is perhaps a quarter of a percentage point interest, and the state doesn’t have immediate plans to issue significant debt.

The fear is what comes next. In early June, S&P warned it could lower the state’s rating again within 90 days if lawmakers don’t act. That warning came about a week before a version of the governor’s Permanent Fund plan died in the Alaska House.

A second downgrade would be unusual, Petek said.

“For a state government to go down more than one notch in a year signals that there’s pretty serious fiscal stress,” he said, adding that S&P is focused on the “sheer magnitude” of the gap between revenue and expenditures in Alaska.

“It’s a bigger gap than we see, in relative terms, in other states,” he said. “It’s something that investors are concerned about as they look ahead … They are asking the question, what will the state’s ability be to repay its debt 10 years from now, if no correction is made?”

The governor has called another special legislative session to focus primarily on a Permanent Fund plan. Lawmakers are due back in Juneau on July 11.

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