Moody’s Investors Services wasn’t just looking at the University of Alaska’s financial outlook following Gov. Michael J. Dunleavey’s vetoes and the ensuing political stalemate in the Alaska Legislature.
Last night, the ratings agency released updated outlooks for a variety of bond-issuing Alaska agencies—including the State of Alaska itself—and the same held true across the board. The outlook is negative.
The State of Alaska, the Alaska Municipal Bond Bank, the Alaska Energy Authority and a variety of already-issued bonds for everything from Goose Creek Correctional Center to sport fishing revenue bonds escaped the downgrade that the University of Alaska saw last week thanks to its $136 million cut.
“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,” writes the agency about the State of Alaska’s outlook. “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.”
Open for business
The only agency that saw its rating downgraded was the Alaska Industrial Development and Export Authority, which saw its bond rating bumped from A2 to Aa3 and its outlook revised from stable to negative. The change means that bonding for the development bank could be more expensive because the buyers could consider the bonds to be riskier.
It’s bad timing for resource development in Alaska because AIDEA is the lead on resource-development infrastructure projects like the controversial Ambler Road that would connect the Dalton Highway with the Ambler Mining District in Northwest Alaska.
The road has faced considerable opposition from rural communities along the route but has been—like most resource development projects in Alaska—pushing ahead and is currently in the environmental impact statement process with a decision due by the end of the year.
Trilogy Metals President and CEO Rick Van Nieuwenhuyse spoke about the project in a recent story with the Fairbanks Daily News-Miner, promoting it as a potential of 43 million tons of mineral reserves including copper, zinc, lead and some precious metals and rare-earth elements. The project, though, needs a road.
“We’ve said from the beginning, no road no mine,” Van Nieuwenhuyse told the newspaper.
The proposed mine is in the same region as the Red Dog Mine that Dunleavy—whose daughters hold or have held jobs there—has frequently held up as an shining example of resource development and a cure to Alaska’s financial woes.
“The Red Dog Mine, where my daughters have worked, is an excellent example of a business that has provided job opportunities for generations of Alaskans while minimizing its effects on things we depend on: clean air, water, and abundant natural food resources,” he wrote in the latest newsletter about the Ambler Mine. “I am committed to supporting such a project as long as it can be done in an environmentally sound manner, is economically feasible, and creates solid employment opportunities for Alaskans.”
The downgrade of AIDEA’s bonding authority could make the it more costly for the project to borrow money for the road’s construction. The precise cost and funding mechanisms for the road are unclear, but the Ambler Access Project cites the Red Dog Mine road as an example. That project required more than $250 million of cash and bonding from AIDEA.
The downgraded rating for AIDEA appeared to be generally speculative by Moody’s, which based it on the possibility that the cash-strapped state could lean on the agency to shoulder more financial burdens. It also argues that AIDEA has never been particularly transparent when it comes to its loan program participants.
“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,” explains the ratings agency’s release. “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.”
It notes that better transparency or improved finances for the state would be good for AIDEA but notes that a downgrade of the state’s bond rating could lead to a further downgrade for AIDEA.