Fitch Ratings assigns an 'AA' rating to $165 million in State of Alaska general obligation (GO) bonds, series 2009A. The bonds are expected to sell via competition on or about April 2. The bonds mature Aug. 1, 2010-2029, and are callable beginning Aug. 1, 2019. The Rating Outlook is Stable.
Alaska's GO rating reflects the state's moderate debt, conservative financial planning, and very substantial reserve balances. Risks include the volatility inherent in state revenues, which fluctuate significantly with oil prices; the state levies no personal income or general sales taxes. Longer-term challenges include the forecasted slow decline in existing oil production and the state's ability to offset it with new oil production, as well as progress toward building a long-planned natural gas pipeline.
The state's economic and financial performance is tied closely to its natural resource base, with 93% of state revenues derived from petroleum-related activity in fiscal year (FY) 2008. High global energy prices, combined with favorable changes in the state's tax system for petroleum led to a substantial revenue windfall in recent years, prior to the sharp decline in petroleum prices during the fall of 2008. General fund revenues were estimated at $10.8 billion in FY 2008, 109% higher than the previous year and well over the $4.9 billion in FY 2008 general fund spending.
The state prudently set aside much of last year's oil revenue windfall to ensure future fiscal stability. This included depositing $4 billion into the constitutional budget reserve (CBR); its current balance is $6.6 billion. The CBR also receives dispute settlement proceeds to the state from petroleum producers. Another $1 billion was placed in the statutory budget reserve (SBR), and $885 million was set aside for prefunding school formula payments. In addition to these reserves, the state has access to realized earnings of the state's $27.3 billion permanent fund, currently amounting to $3.5 billion for state appropriations, if necessary.
The sharp decline in petroleum prices during the latter half of 2008 is requiring the state to make use of reserves to cover spending needs in the current fiscal year and beyond. At present, FY 2009 revenues are anticipated to decline 49% from FY 2008, to $5.5 billion, assuming an average oil price of $63.28 per barrel; the state's original budget assumed an average price of $83.04 per barrel. Under the updated forecast, a draw of $1.4 billion from reserves would be required to cover authorized spending of $6.9 billion, a figure which includes a $1 billion transfer to the CBR, made earlier this year.
In FY 2010, the state now forecasts oil prices averaging $57.78 per barrel, which would generate revenues of $3.2 billion, 43% lower than FY 2009. The governor's fiscal 2010 spending proposal, currently under legislative consideration, totals $4.4 billion, 36% below the current year's level. The current proposal was reduced by $269 million from an earlier proposal in response to the forecast change; it also foresees a draw of $1.3 billion from reserves to cover spending needs. Under a state stress case forecast of oil prices averaging $40 per barrel, the necessary draw from reserves would rise to $2.6 billion.
The state is an infrequent debt issuer, meeting most capital needs from current revenues. The debt burden as of June 30, 2008 is moderate, at 3.4% of personal income and $1,346 per person after excluding guaranteed debt of the Housing Finance Authority, which has never required state support, and reimbursable school debt. Approximately 63% of debt amortizes in 10 years, essential given current forecasts of oil production declines.
The state has authorized up to $5 billion in pension obligation bonds (POBs); current plans foresee possible issuance of $2 billion later this year. Use of POBs would be one of many efforts undertaken to address the unfunded pension and retiree healthcare liability of state and local governments, a constitutional obligation of the state. Two major statewide systems, for general public employees and for teachers, are funded at 68% and 62%, respectively, as of June 30, 2007 for pensions and OPEB. Reforms included changing to defined contribution plans beginning July 1, 2006 and legislation enacted in 2007 obligating the state to assume local governments' contributions over a fixed percentage of payroll. Issuance of POBs would offset part of the remaining liability but significantly raise the state's fixed debt burden.
Fitch also affirms the ratings on the following obligations of the State of Alaska:
--State of Alaska GO bond at 'AA';
--State of Alaska state certificates of participation, at 'AA-';
--State of Alaska state lease obligations at 'AA-';
--Municipality of Anchorage state lease revenue bonds at 'AA-';
--Matanuska-Susitna Borough state lease revenue bonds at 'AA-'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Fitch Ratings, New York
Douglas Offerman, 212-908-0889
Richard
J. Raphael, 212-908-0506
or
Media Relations:
Sandro
Scenga, 212-908-0278
Email: sandro.scenga@fitchratings.com