FITCH ALSO NOT KEEN ON CONSTITUTIONAL AMENDMENTS
One of the major ratings services has flagged the three constitutional amendments proposed by Gov. Michael Dunleavy as actions that could erode the state’s current credit rating.
Fitch Ratings said that the amendments, if passed, may harm the state’s ability to proactively manage its financial operations and “could result in negative pressure on the state’s Long-Term ‘AA’ Issuer Default Rating (IDR)/Stable Outlook.”
Fitch has not seen the expenditure side of the story, or may be unconvinced it can be achieved. Although the analysts understand Alaska has been living beyond its means for a long time, they sounded the alarm without having a full picture of what the budget will look like when it’s signed into law later this year.
Credit ratings affect how much the State has to pay when it borrows money, as it intends to do later this year to pay some $740 million in debts, such as oil tax credits.
The State’s credit rating tanked in 2015 when oil prices dropped and the Walker Administration did not bring spending down to reflect declining oil revenues.
The three proposed constitutional amendments would require voter approval for any new or increased taxes; would enshrine the Permanent Fund dividend formula into the Alaska Constitution, and place a real spending cap on spending. Permanent Fund dividends would be paid first, before funds were available for state programs.
“Fitch believes the enactment of these amendments, which require approval by two-thirds of each legislative chamber and a state-wide vote, could weaken assessments for key rating drivers related to budget control (i.e., independent legal ability to raise revenues, expenditure flexibility, financial resilience, and budget management), and therefore, exert pressure on the ‘AA’ IDR for the state.
“Removing legislative discretion over the PFD formula alone would require a $1.9 billion dividend payment to residents in fiscal 2020, well ahead of the $1.2 billion payment proposed by the prior governor in his $6.9 billion executive general fund budget.
“Barring other offsetting action, this would result in a more significant draw on the approximate $16 billion PF Earnings Reserve (PFER) than currently expected. The maintenance of reserves is a significant rating consideration for Alaska given the volatility inherent in the economic and resource base,” the company said.
Fitch noted that Gov. Dunleavy has also submitted separate legislation to pay back Permanent Fund dividends that were taken by the previous administration.
“Passage would result in larger PFD payments from the PFER for eligible residents in fiscal years 2020 through 2022. The state estimates restoration payments would total a maximum of $2.3 billion based on proposed eligibility guidelines.
Under the Permanent Fund Protection Act of 2018, the state established annual draws on the fund’s earnings reserve account to patch projected budget gaps.
Fitch predicted at the time that the earnings reserve account would eventually be depleted under the plan. The payback of the Permanent Fund dividends “would be expected to escalate depletion of the PFER, barring other moves to reduce the anticipated use of PFER funds to support general operations.”
Gov. Dunleavy’s fiscal 2020 budget proposal is due on Feb. 13. That’s when the $1.6 billion in state spending cuts is expected to be revealed. Dunleavy has stated that he’ll bring spending in line with revenues, and any additional spending for government services will need to be proposed by the Legislature, along with a way to pay for them.