Ratings agency says Dunleavy budget proposals could hurt credit of local governments

Gov. Michael J. Dunleavy’s budget cuts and proposals to seize hundreds of millions of dollars in property taxes from local governments would “have significant negative impacts on local municipalities’ credit quality throughout the state if enacted.”

The memo was released by Fitch Ratings on Wednesday, acknowledging the budget and proposals still have to work their way through the legislative process. A copy of the memo was provided to The Midnight Sun today. Credit ratings and credit quality play a big factor in the ability of municipalities to issue bonds or borrow money.

It says cuts to school funding would likely be met with increases to local property taxes at a time when the administration is seeking to funnel about $440 million in property taxes collected on oil and gas properties from municipalities to state coffers.

“Reductions in formulaic school funding could put the onus on borough policymakers to partially backfill some district revenue losses and could crowd out spending on other services, creating budget stress for borough governments,” explains the memo, adding that the pressure could make it more expensive for districts to borrow money. “Higher debt service tax rates could make it more difficult to garner public support for tax increases that would be needed to offset losses in operating revenues and could decrease public appetite for school bonds to meet ongoing capital needs.”

It also notes that the pain wouldn’t end there: “Cuts in overall state and local government spending could also have negative impacts on employment and economic activity.”

The memo also examines Senate Bill 57, which would end bar local municipalities from collecting taxes on oil and gas revenue. It says that the North Slope Borough, which receives $372 million, would be the hardest hit with almost no other recourse.

“Fitch believes the borough is unlikely to be able to reduce spending to match revenues available under the governor’s plan, and earnings on its large permanent fund (which equaled $708 million at the end of fiscal 2018) would be insufficient to replace the lost revenues on an ongoing basis,” explained the memo.

The ratings agency has not yet taken any action to reduce credit ratings for the municipalities because the proposals “appear to have very uncertain legislative prospects in both the Alaska House and Senate. The proposals were met with immediate opposition from local government leaders across the state, many of whom have joined the North Slope Borough in lobbying to kill the property tax legislation.”

It also notes that a larger review of the governor’s budget will be due at a later time.

Not a fan of constitutional amendments, either

Fitch Ratings released an analysis of Dunleavy’s proposed constitutional amendments on Feb. 5, 2019 finding they “could result in negative pressure on the state’s long-term ‘AA’” rating. The long-shot proposals would enact a spending cap and require any changes to the PFD or taxes to be put up to the voters.

“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,” it says.