Breaking: Moody's downgrades AIDEA, puts Alaska on negative status - Must Read Alaska
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Sunday, December 15, 2019
HomeThe 907Breaking: Moody’s downgrades AIDEA, puts Alaska on negative status

Breaking: Moody’s downgrades AIDEA, puts Alaska on negative status

Moody’s Investors Service has put the State of Alaska on a “negative” outlook and downgraded the Alaska Industrial Development and Export Authority.

Alaska’s rating for State General Obligation was affirmed at AA3, but the outlook has been revised from “stable” to “negative. The State’s moral obligation is now A2. It’s the agency’s way of telling the Alaska politicians to stop spending more than they are taking in in revenue.

“At the same time, we have affirmed ratings of the Alaska Municipal Bond Bank at A1; the State of Alaska Lease Revenue Bonds, Series 2008 and Lease Revenue Refunding Bonds Series 2015 bonds for the Goose Creek Correctional Center Project both at A1, and the Certificates of Participation, Series 2014 (Alaska Native Tribal Health Consortium Housing Facility Project) also at A1. The rating on moral obligation-supported bonds issued by the Alaska Energy Authority was affirmed at A2. The outlook on all of these bonds is now negative,” the ratings company wrote.

A negative or downgraded bond rating makes it more expensive to sell bonds for not only the State but for governmental units like Municipalities.

RATINGS RATIONALE

“Alaska’s credit position benefits from an ability to fund operations partly from earnings derived from the Alaska Permanent Fund. Credit challenges, such as a narrow economy, comparatively large net pension liability, elevated exposure to climate change and high reliance on the state’s oil production industry, have been largely offset by sizable budgetary reserves. A new focus on distributing increased shares of Permanent Fund earnings to residents, combined with political paralysis or other factors that prevent a return to budget balance, may make the current fiscal approach unsustainable over time, particularly in the event of financial market downturns or the inability to sufficiently contain spending growth.

“Alaska’s appropriation bonds are a notch below the state’s Aa3 GO rating, to capture the risk that a future legislature could fail to enact timely legislation authorizing payment. This rationale applies to both the debt issued by the state for two specific projects and to bonds issued by the state’s Municipal Bond Bank to finance projects of certain local governments. The two state project financings both involve more essential projects – a prison as well as a facility to assist in the delivery of healthcare to the state’s native population. For the bond bank’s debt, the state’s established practice of appropriating in advance to provide for debt service reserve replenishment transformed a moral obligation credit into one that is essentially an appropriation bond. Also, the bond bank’s a very strong legal provisions – including the state’s ability to intercept state aid payable to borrowers – offset the potentially mixed nature of facilities financed.”

RATING OUTLOOK

The negative outlook reflects the risk of deterioration of financial metrics or governance practices particularly if political paralysis impedes policymakers from agreeing on effective approaches to the state’s key credit challenges.

FACTORS THAT COULD LEAD TO AN UPGRADE

– Demonstration of ability to fund operations from recurring resources through economic cycles

– Reduction in unfunded pension liabilities

FACTORS THAT COULD LEAD TO A DOWNGRADE

– Persistent operating imbalances that threaten to deplete financial reserves or other evidence of liquidity strain

– Significant worsening of unfunded pension liabilities

ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY

As for AIDEA, the ratings dropped two levels from an AA3 to an A2. The justification given was that the State keeps eyeing the AIDEA funds, while an impasse persists over fiscal policies and the use of earnings from oil.

Moody’s Investors Service has downgraded the Alaska Industrial Development and Export Authority’s (AIDEA) Revolving Fund bonds to A2 from Aa3. The outlook has been revised to negative from stable. The rationale from the ratings agency follows:

“AIDEA’s revolving fund bonds are payable from revenue of the Revolving Fund, the authority’s operating fund. Despite very high debt-service coverage and large amounts of liquidity relative to debt currently outstanding, a rating below the State of Alaska’s (Aa3, negative) general obligation rating is warranted because of AIDEA’s relationship to the state. Alaska’s current impasse over fiscal policies – particularly the priorities for revenues generated from earnings of the Alaska Permanent Fund – underscores the Revolving Fund bonds’ exposure to actions the state may take as it seeks to adopt a revenue model less dependent on North Slope oil production. The state collects annual dividends from AIDEA and also has the capacity to push funding burdens onto it, although to date it has not done so. Additionally, the downgrade better aligns AIDEA’s Revolving Fund bond rating with the fact that AIDEA provides very limited information on its loan program participants, apart from broad factors such as collective loan delinquency rates (which have averaged less 1% since 2008).

RATING OUTLOOK FOR AIDEA

“The negative outlook reflects the risk that the state’s financial pressures will encourage actions that undermine AIDEA’s credit position by reducing the authority’s liquidity or shifting burdens to the authority,” the ratings company wrote.

FACTORS THAT COULD LEAD TO A DOWNGRADE FOR AIDEA

– Downgrade of the state’s rating

– Actions by state that increasing amounts of cash from AIDEA or force it to absorb financial burdens

LEGAL SECURITY

“AIDEA’s bonds are backed by the revenue of the authority’s Revolving Fund, which has three sources: Principal and interest payments on commercial loans, income from development projects owned outright and returns on a portfolio of investments. The authority covenants to refrain from actions that would drive debt service coverage below 1.5 times, and issuance of new bonds is subject to a test that revenue will cover maximum annual debt service by the same amount. In addition, the authority is required to maintain large substantial cash in connection with its debt: unrestricted surplus must equal the lesser of debt outstanding or $200 million (and in any case at least $100 million). A share of the authority’s financial reserves – the lesser of $50 million or 25% of outstanding debt – must be maintained as cash, money market funds or other highly liquid investments. Annual dividend payments from AIDEA to the state, provided for in state law, cannot run afoul of these provisions.”

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Suzanne Downing had careers in business and journalism before serving as the Director of Faith and Community-based Initiatives for Florida Gov. Jeb Bush and returning to Alaska to serve as speechwriter for Gov. Sean Parnell. Born on the Oregon coast, she moved to Alaska in 1969.

Latest comments

  • The gods of the copybook headings, AKA the bond market, has spoken.

  • Please people – Don’t you see as I do that the Dividend has poisoned our politics? We should be so friggin’ happy to have a state that has no income tax or sales tax. Then we get a Dividend to boot! It is a libertarian capitalist dream! Don’t screw it up. We can set ourselves up for the future with the surplus earnings of the State. My proposal is to set up a trust fund for every Alaskan. Your individual account will increase in value at a parabolic rate because it will be co-invested with the Permanent Fund. Plus each year the Legislature can appropriate the surplus funds into the Trust -parabolically increasing the growth rate in your account.
    We have to get away with arguing about the size of the Dividend. The checks and balances must remain in the Legislature according to our Constitution.

    • i believe it was Harold Gillum that gave me advice on how to accomplish my proposal at a meeting of the PF Board. It was after Oral Freeman tried to slap me down because he misunderstood what I was saying. 30 years now and few people are as smart as Harold. May he rest in peace.
      I will carry the torch until the next bellicose politician tries to slap me down again.

      • Dave Rose was there too. He tried to assuage the tension and gave me a thumbs up for taking the abuse from Oral Freeman.
        Dave seemed to be an alright dude but no one ever again asked me for my learned opinion. I was ID’d as a libertarian capitalist and thus shunned by the political power brokers. Either Left or Right it was all about the money honey. You were either in the scam or out.

      • Chris,
        I appreciate your thoughts, but I must point out the “Rationale” listed above on why the downgrade is actually happening.
        “Credit challenges, such as a narrow economy, comparatively large net pension liability, elevated exposure to climate change and high reliance on the state’s oil production industry…”
        This is the matrix of events that is truly at our doorstep this year.
        As South-central sees a rare drought (arguably caused by Climate Change) and we as Alaskans experience another wildfire season similar to 2004 & 2015, the associated costs will further compound state and federal budgets.
        The state pension problem is one factor that can be mitigated to some extent with proper guidance and help.
        The third leg of this stool is Renewable Energy that can help diversify the Alaskan Economy and “wean” us off the dependence of oil extraction. (While slowly mitigating the “feedback loops” caused by Climate Change)
        Distribution of the PFD as it was intended can actually help keep entrepreneurs in Alaska to work on solutions to grow a more diverse economy over the next generation.
        The last decade of lavish spending has shown that the “checks and balances” are definatly NOT in the Legislature…and any Alaskan who cares about their state should be concerned.

        • “The state pension problem is one factor that can be mitigated to some extent with proper guidance and help.” Care to explain this gibberish, Steve?

          • Bill,
            Like I have said many times “Alaska is not an Island “.
            Many states are in the same boat with their pension funds.
            “Today’s pension shortfalls were caused in substantial part by the 2001 recession and the recent Great Recession.”
            These economic downturns have led to “underfunded pension funds” across America.
            Many economists have solutions to “right this ship” while still maintaining its overall value.
            “…If states and localities over the next five years boost their pension contributions to roughly 5 percent of their budgets on average (compared with the present level of 3.8 percent), they can make major progress in restoring plans to full health; if benefits are reduced or employee contributions increased, the increases in state contribution can be smaller than would otherwise be necessary.”
            https://www.cbpp.org/research/a-common-sense-strategy-for-fixing-state-pension-problems-in-tough-economic-times

          • Steve, for some reason I couldn’t reply to your post so will try this.
            Your post is talking about other State’s pension issues that have nothing to do with Alaska pension shortfall. Alaska’s was due to State relying on the advice of it’s contractor that resulted in that shortfall-State sued and our now junior Senator (Sullivan) settling said lawsuit for much less than what was needed to fund that shortfall.
            Tough economic times have nothing to do with this debt IMO. Alaska will pay off it’s indebtedness as it pays for other budget items (based on philosophy of Administration), but the debt remains and interest on that debt keeps on keeping on.
            Regardless of one’s opinion on Sullivan’s decision it remains that Alaska’s situation is unrelated to your bit about other State’s shortfalls. And Alaska’s shortfall is not being added to by any issues with its present funding.
            Are you suggesting that present employees make up this shortfall that is not of their doing? This was a State problem, exclusively, and what it your reasoning, here?

  • “It’s the agency’s way of telling the Alaska politicians to stop spending more than they are taking in in revenue.”
    .
    Sort of. Here’s a translation.
    .
    “A new focus on distributing increased shares of Permanent Fund earnings to residents” — the demand for a 3,000 PFD is threading the viability of the fund.
    .
    “combined with political paralysis or other factors that prevent a return to budget balance” — the Wasilla stunt and a political structure that allows 10 people to rule over 50 prevent a sane budget from being passed.
    .
    “such as a narrow economy” — Alaska has a resource extraction economy is sabotaging it’s best chance to diversity by destroying the university system.
    .
    “elevated exposure to climate change” — climate change is real and could threaten the hydro power and fishing industries while increasing transportation challenges.
    .
    “Alaska’s current impasse over fiscal policies” — Can you believe that 10 people are holding the economy hostage and up to a 1/4 of legislators won’t even show up to vote?

    • Adam,
      I fail to see how the University System is our “best chance to diversity” our economy when history has shown most of the world’s top entrepreneurs were “college dropouts”?
      Looking at Bill Gates, Steve Jobs and Mark Zuckerberg…you will find ONE thing in common…NO sheepskin upon their walls.
      Dumping more money into a failing university system only leads us further down this long and dusty road in AK.

      • Occasionally hear some garbage on here but this really stands out!

        • Bill,
          One man’s trash is another man’s treasure!
          “Debt among 19 to 29-year-old Americans exceeded $1 trillion at the end of 2018, according to the New York Federal Reserve Consumer Credit Panel.”
          Do you really feel that adding more to the National Debt with thousands of frivolous college loans to the next generation is the correct path forward?
          Guys like Steve Jobs have used their skills to innovate America in industries from shipping and recieving to hospitals throughout the country.
          “After just one semester at Reed College in Oregon, Jobs dropped out of school. After a brief job at Atari, Jobs backpacked through India and experimented with psychedelic drugs – both which he claims “expanded his mind and helped breed Apple’s counterculture, ‘think different’ spirit.” 
          I am not saying college does not play a role in society, just that we cannot “bank roll” generation after generation with state and federal loans while further subsidizing the backbone of state run universities across America.
          Obviously the current path is bankrupting our Nation.

          https://mashable.com/2016/09/22/12-entrepreneurs-who-dropped-out-of-college/

          • While the loan program needs fixing, it’s hardly bankrupting our Nation. Our removing student loans from bankruptcy laws is something that is clearly bankrupting many students but that’s just a political situation that may change.
            I agree that these loans have sucked in plenty of students and further has increased enrollment (probably not warranted), but there will be adjustments IMO.
            What reasoning do you offer that would make this student debt different from any other debt (relative to bankruptcy laws)? Is this “frivolous” debt different than other “frivolous” debt? You do know the reason for bankruptcy laws, right?

          • Bill,
            There are several reasons that make student debt different from typical consumer loans.
            “Education is abstract; if they’re not paid back, then there is little recourse for the lender. There is no physical object that can be seized. Student loans did not exist in their present form until the federal government passed the Higher Education Act of 1965, which had taxpayers guaranteeing loans made by private lenders to students. While the program might have had good intentions, it has had unforeseen harmful consequences…
            When government-guaranteed checks keep rolling in, there’s no incentive for colleges and universities to lower their prices.
            In fact, they do the opposite…
            Both subsidized and unsubsidized loans are guaranteed by the U.S. Department of Education, either directly or through guarantee agencies…
            Nearly all students are eligible to receive federal loans (regardless of credit score or other financial issues).”
            These factors compounded with the “no child left behind” attitude of the last 20 years has placed both the Federal government and state institutions in tremendous amounts of debt.(from both student loans and building grants)
            Writing off over $ 1 Trillion in student loans would further hurt the economy and also not be fair to students like myself who did not charge up more than I could pay back.
            There needs to be a balance between Debt and Success…where that balance lies is very debatable.
            https://fee.org/articles/how-government-guaranteed-student-loans-killed-the-american-dream-for-millions/

          • Steve, I asked for the difference between these frivolous college loans and other frivolous debt. Our bankruptcy laws are, by design, for allowing people out from under their debt if there is no way they can pay it off. Why should this debt not be allowed under our bankruptcy laws?
            Your turn again.

      • Steve,

        Maybe Bill Gates, Steve Jobs and Mark Zuckerberg are college dropout, but their companies are hiring college graduate.

        Then, why haven’t you cite Elon Musk, Larry Page, Jeff Bezos, and keep going with Shaquille O’Neal, Michael Bloomberg, Indra Nooyi, Tim Cook, Eamonn Sinnott, Mary Barra, Doug McMillon (Walmart), Darren Woods (Exxon), Warren Buffett…

        Maybe because all of them have a college degree and have a highly successful career.

        If you are not truly convinced, you can look up the numbers, there is roughly 20% of the U.S. workforce started college but dropped out, however that demographic makes up less than 10% of the Forbes list. Maybe, one should not praise college dropout on a couple of success story, which helped to build a myth…

      • Steve,

        Chances are that I’m responding so late that you won’t be able to read this but:
        .
        Gates and Jobs dropped out spending hours in the university basement learning to program on multi million dollar mainframes. I couldn’t think of a better example of how universities pay for themselves. No start up could have afforded one of million dollar math machines or even the electricity to run them.
        .
        Also, imagine if Zuck had to teach his employees math. Seriously. Imagine if corporations had to educate their employees themselves. What would that add to R&D costs. Or to read and write? Study after study after study shows that universities pay for themselves and then some. There are reasons these innovations are happening in places like the bay area, Texas and Boston.
        .
        This site recently eulogized Perot — I think if he were here today he would admit that Texas Instruments wouldn’t have had chance without the UT system.

  • Obviously we can’t trust legislators to keep laws and do what’s right or they wouldn’t of taken PFD and broken their own laws regarding giving themselves a per diem.

    If legislators had not over spent in recent yrs we’d be okay and they wouldn’t want to take from the Alaskan people’s PFD so they could continue to overspend. Eventually we will probably spend it all & pay high taxes like everyone else. Legislators don’t even want to allow Alaskans to vote wether we want cuts or our PFD’s!!!
    I personally think taking money from the Alaskan People’s PFD is stealing from Alaskans. This money was for the future of Alaskans and not supposed to be touched & spent by government, especially since it could help a lot of people in tough straits & helps commerce, people are able to pay fuel bills, buy needed vehicles, food, clothing, things for the kids such as soccer fees or swimming etc.

    • I agree.

      The PFD is not the government’s money. It is the Alaskan people’s money.

      The government’s incompetence is why it was never to be entrusted to them.

    • As politely as I can say: Cindy you are incorrect. Regardless of past legislatures we have only today we can deal with.
      All we need to do is balance the budget. We are so fortunate that we will have “surplus income” after balancing the budget.
      This surplus income can establish a trust fund for every Alaskan with annual contributions every year they reside in Alaska (similar but different to the current PFD.)

  • No matter what you believe – there is no alternative to a legislative body to decide our annual appropriations to the body of the State.
    You cannot claim a share of our common resources for yourself. Sorry you have to hear it from me.
    Hey Sean! Lets get into it!….Chris

    • Chris Nyoman – while I enjoyed reading what you have had to say above as well as Steve Stine’s comments and agree with many points – I do not agree with your statement “you cannot claim a share of our common resources fo yourself.” The pfd dividend payout was set up as just that. With that argument you should not collect any dividends from any of your stock investments, 401k, SEP, whatever, as technically you share common ownership there as well. I truly really do not care about pfd amount but I do believe the pfd gives the public some clout and it is the citizenry that should make th decision on allowing the pfd to be used for the state budget. Bottom line, our state has a spending problem, we are highest in the nation in spending, hence our elected officials need to rein it in. No more money until they do so! Lastly, we gave up a big ‘twig’ of our bundle of rights when we voted to give up our subsurface rights for common resource ownership. The pfd is an importance element in that.

      • Chris Nyoman – Apologies for last name typo above – my efforts at phone thumb pecking ?

        • Chris —I did it again! Good grief I think it is auto correct! I give up!

      • Elizabeth…”Amen”

  • DUNLEAVY STRONG!

    • Nope, Judie!

      You should reverse the words, and add another one in the middle: STRONG, RECALL DUNLEAVY!

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