National bond rating agencies aren’t finding a lot to like in Alaska right now with recent downgrades to the outlook for the state of Alaska, the University of Alaska and various other Alaska entities amid cuts and political paralysis over the state’s budget.
One place where that pessimism hasn’t reached is the Municipality of Anchorage, which saw its bond ratings affirmed last week by Fitch Ratings and Standard and Poor’s. Anchorage Mayor Ethan Berkowitz highlighted the news in a press release on Tuesday.
“With the recent downgrade of both the State of Alaska’s and the University of Alaska’s bond ratings, the reaffirmation of the MOA’s positive bond rating demonstrates that doing things the Anchorage way brings strong economic opportunities to investors and residents,” he said in a prepared statement. “Despite the tumult at the State level, our city continues to inspire confidence in professional and individual investors—that’s what it means to be open for business.”
The Fitch Ratings press release about Anchorage says the ratings, which affirm the city’s “AA+” ratings on new and already-issued general obligation bonds, “reflect the municipality’s superior financial resilience to typical cyclical stresses” with a stable property tax base and large government-sector employment from Joint Base Elmendorf-Richardson, the state and local employment.
It does note, however, that the long-term outlook could become more challenged for Anchorage if the economy goes south or the city doesn’t keep spending in check with revenue.
“(The ratings) could come under downward pressure if the current economic downturn is notably deeper and more durable than past periods of weakness, leading to outmigration of residents and erosion of the revenue base. The ratings could also come under downward pressure if the municipality fails to adjust spending to match available revenues during the current period of economic weakness,” explained the report.
The Anchorage ratings update also recognizes uncertainty outside the control of Anchorage, including cuts driven by Gov. Michael J. Dunleavy as well as uncertainty for international trade that might have an impact on Anchorage’s seaport and airport.
“Recent multi-year budget cuts to the University of Alaska from the governor’s office could exacerbate both job and population losses as the university system aligns its expenditures with future revenues,” Fitch Ratings explains. “The municipality is also home to a large seaport and one of the world’s busiest cargo airports. Current federal trade policies have introduced some uncertainty regarding both growth and employment figures for both the sea and airport, along with the businesses throughout the Anchorage economy that support both ports.”
A recent report from the Alaska Department of Labor and Workforce Development noted that job growth in Anchorage has lagged behind the rest of Alaska as the state makes its slow recovery from the latest economic downturn.
Why it matters
The rating comes amid recent downgrades for the state of Alaska, the University of Alaska, the Alaska Municipal Bond Bank, the Alaska Industrial Development and Export Authority and others that continue years of downgrades amid the downturn in oil prices.
The latest downgrade for the state came from Fitch Ratings, which downgraded the rating on $724 million in general obligation bonds from “AA” to “AA-” and another $1.1 billion in state appropriation bonds were downgraded from “AA-” to “A+.” The Municipal Bond Bank Authority also saw its resolution bonds downgraded from “AA-” to “A+.”
The latest report from Fitch about the state noted that the state is continuing to operate with a structural deficit that relies on state savings and that cuts to Medicaid and the University of Alaska may undermine the state’s economic future. It’s also critical of Dunleavy’s plans to pay out a full dividend given the state’s financial position.
“To date, operating revenue remains anemic, and the administration’s commitment to funding a full permanent fund dividend payment despite projected revenue loss has contributed to the enactment of a fiscal 2020 budget that includes deep cuts to core state services,” explained the report. “Additionally, Fitch believes the substantial reductions to health care and higher education could have implications for future growth of the state’s already limited economy and may potentially increase the state’s susceptibility to volatility in the natural resources industry.”
The bond ratings serve to judge the financial outlook of an entity, judging the risk associated with the bonds issued by it. In return, the safer a bond is judged the better the interest rate a municipality can get when it borrows, making it cheaper to borrow. The worse the bond rating is, the more expensive borrowing will be.
The announcement from Anchorage says that’s been the case for its borrowing, noting that rate on 20-year bonds is currently 1.5 percent lower than it was 10 months ago.