Alaska loses AAA rating from S&P as oil price drop harms budget

Alaska had its credit rating cut to AA+ from AAA by Standard &Poor’s as persistently low oil prices leave the state with a growing gap in its budget.

The downgrades of Alaska’s general obligations, appropriation debt and bonds from its energy authority “reflect our view of the state’s credit quality as oil prices have continued to slide, falling below forecasts from earlier this year, causing an already large structural gulf between unrestricted general fund revenues and expenditures to widen further,” S&P analyst Gabriel Petek wrote Tuesday in a report.

The credit rater’s outlook remains negative, signaling future cuts if lawmakers don’t pass measures to curb the budget deficit during this year’s legislative session, according to the report. Moody’s Investors Service continues to rate Alaska Aaa.

Oil prices have plunged by more than 60 percent since mid-2014, wreaking havoc for the budget in Alaska, which depends on once-plentiful crude oil-related tax revenue. The state will collect only a third of the expected $5.2 billion in revenue for the fiscal year ending June 30, creating a mid-year shortfall, said Deven Mitchell, the state’s debt manager at the Alaska Department of Revenue.

Alaska is seeking to increase the size of its potential 2016 pension-obligation bond sale to $2.6 billion as part of a multi-step process to repair the state’s budget. That may also include a personal income tax, something the state hasn’t seen in 35 years, according to Mitchell. The state has given oil dividend checks to residents, though that tradition may end, Mitchell said.

“The action taken by Standard &Poor’s to lower Alaska’s credit rating is concerning and premature given that the legislature has not had time to act on a long-term fiscal plan,” Gov. Bill Walker said in a statement. “However, this further solidifies the need to address our state’s fiscal challenges in the immediate future.”

Moody’s said in a separate report Tuesday that Walker’s proposals, including the income tax, represent “a bold effort to address the state’s enormous budget imbalance caused by sharply lower oil prices and to shift the future funding of government operations away from direct oil sector volatility.”

Only nine states that issue general obligations now carry top ratings from S&P: Delaware, Florida, Georgia, Maryland, Missouri, North Carolina, Texas, Utah and Virginia.