Fitch Rates Alaska's $173.5MM GOs Series 2012A 'AA+'
NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to general obligation (GO) bonds of the state of Alaska (the state), consisting of:
--$173.5 million GO refunding bonds, series 2012A.
The bonds are expected to sell via negotiation the week of Jan. 16, 2012.
In addition, Fitch affirms the ratings on the following bonds:
--Approximately $643.8 million state of Alaska GO bonds at 'AA+';
--Approximately $14.1 million state of Alaska state certificates of participation at 'AA';
--Approximately $16 million municipality of Anchorage state lease revenue bonds at 'AA'; and
--Approximately $216 million Matanuska-Susitna Borough state lease revenue bonds at 'AA'.
The Rating Outlook is Stable.
General obligations to which the full faith, credit and resources of the state are pledged.
State certificates of participation and state lease revenue bonds are backed by the state's appropriation commitment for debt service and therefore rated one notch below the state's GO rating.
KEY RATING DRIVERS
VERY LARGE RESERVES: The state has set aside very large reserves for general fund operating needs, principally in the Constitutional Budget Reserve Fund (CBR) and Statutory Budget Reserve Fund (SBR). The state has used recent windfalls from high oil prices to repay past CBR draws and remains committed to building future reserves.
CONSERVATIVE FINANCIAL PLANNING: Conservative financial planning is an essential factor given the state's dependency on energy-related revenues and volatility of energy prices and production. The state has prudently used available cash to fund its capital needs and cash-defeased outstanding obligations when cost-effective.
ECONOMY AND FINANCES DEPENDENT ON NATURAL RESOURCES: While natural resources and the federal government have provided sources of employment and income to the state's small population, the volatility inherent to the natural resource industry is an area of vulnerability; petroleum-related revenue accounts for approximately 90% of unrestricted General Fund revenue. Potential downsizing of federal government employment could impact future state employment levels.
MANAGEABLE DEBT POSITION: The state's debt burden is moderate. The state's previously rapid debt amortization has slowed but remains average at 52% of principal retired in ten years.
Alaska's 'AA+' GO rating reflects the state's very substantial reserve balances and conservative financial management practices. State revenues are linked closely to oil production from the North Slope and global petroleum price trends, exposing the state to significant revenue volatility. Accordingly, state fiscal practices are generally conservative, with the state dedicating a substantial share of oil-related revenue to reserves and employing long-range forecasting of revenues and expenses. Planning has slowed on a natural gas pipeline from the North Slope, completion of which would help diversify state revenues, due to weakened natural gas prices and competition from shale development in the continental United States. Such diversification would be a significant credit factor given the forecast slow decline of oil production. Debt practices are conservative, with limited issuance and average amortization. The economy remains stable, although the state has potential exposure to federal employment cutbacks tied to budget pressures at the federal level.
The state's economic and financial performance is tied closely to its natural resource base, with 92% of unrestricted general fund revenues derived from petroleum-related activity estimated for fiscal year (FY) 2012. Fluctuating global energy prices in 2007, 2008, and 2009, led to sharp surges and drops in the state's unrestricted general fund revenues in the related fiscal years. Revenues have stabilized since fiscal 2009 along with petroleum prices.
FY 2010 oil prices averaged $74.90 per barrel, well over the $58.29 per barrel forecast on which the budget was based. The enacted FY 2011 budget forecast oil prices at $77.65 per barrel; the actual oil price was $94.49 per barrel, increasing revenues by $2.3 billion. On a GAAP basis, FY 2011 ended with a $2.2 billion general fund surplus and a $260.7 million payment to the CBR; $887 million in revenue flowed to the state's permanent fund.
The fall 2011 revenue forecast points to FY 2012 revenues landing well ahead of budget due to continued high oil prices; currently forecast at $109.33 per barrel. FY 2012 unrestricted general fund revenues are forecast at $8.9 billion, up from the $7.3 billion forecast in the spring of 2011, providing more than sufficient resources for $6.9 billion of recurring and discretionary appropriations. The state is planning for a $1.9 billion deposit to the CBR at fiscal year end from the anticipated surplus.
The governor recently proposed a fiscal 2013 operating budget that forecasts oil prices remaining steady at $109.33 per barrel, with a slight decline in oil production assumed. Fiscal 2013 unrestricted general fund revenues are forecast at $8.2 billion, an 8% decline from anticipated revenues in FY 2012, and proposed recurring and discretionary appropriations, at $6.4 billion, are 6.3% less than the prior year; primarily due to a $675 million proposed cut in capital expenditures. The proposal also includes a $1.8 billion transfer to the CBR. The budget proposal will be considered in the 2012 legislative session and Fitch also expects the governor to pursue reforms to the oil tax structure, with the goal of encouraging additional investment and drilling. Fitch will evaluate the impact to the state's financial operations and reserve levels from the passage of any oil tax reform.
As noted above, the state has prudently set aside much of its revenue windfall in the CBR and SBR to repay past borrowing and ensure future fiscal stability. Deposits of surplus funds as well as dedicated petroleum dispute settlement funds have brought the CBR's balance to $10.3 billion as of June 30, 2011. The SBR has grown to $2.6 billion as of June 30, 2011 and over $1 billion has been set aside for prefunding school formula payments. Additional balances available to the state include realized earnings of the $36.7 billion Alaska Permanent Fund, measuring $2.3 billion as of June 30, 2011.
The state is exposed to a disproportionately large government, particularly federal, presence. As of November 2011, government employment accounted for 26.8% of total employment (compared to 17.3% of the nation) and the federal government directly accounted for 5% of employment. The state estimates that 36% of total employment in the state stems from the federal government presence. Given budgetary pressures at the federal level and anticipated federal cutbacks, potential employment losses could have an impact on the state's economy.
Alaska's unemployment rate has historically been above that of the nation, with a notable shift occurring during the recent recession to falling below that of the nation; 7.3% in November 2011 compared to 8.6% for the nation. Per capita personal income levels continue to remain above national averages (110.7% in 2010).
The state is an infrequent debt issuer, meeting most capital needs from current revenues. The debt burden as of June 30, 2011 is moderate, with $1 billion in net tax-supported debt measuring 3.3% of personal income after excluding guaranteed debt of the Housing Finance Corporation, which has never required state support, and reimbursable school debt. The pensions for two major statewide systems, for general public employees and for teachers, were funded at 62.4% and 54.3%, respectively, as of June 30, 2011 based on an 8% investment return assumption. Using Fitch's more conservative 7% assumption, the funded ratios decline to 56.2% and 48.9%, respectively.
Other post-employment benefits alone are funded at 50.4% for general public employees using an assumed 7.23% investment return assumption, and 48.1% for teachers, as of June 30, 2011. The state has undertaken multiple pension reforms in recent years, including switching to a defined contribution plans for new employees beginning July 1, 2006 and legislation enacted in 2007 obligating the state to assume local governments' contributions over a fixed percentage of payroll. The state has no current plans to issue up to $5 billion in pension obligation bonds that were authorized in 2008.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 15, 2011;
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 15, 2011;
--'Enhancing the Analysis of U.S. State and Local Government Pension Obligations', dated Feb. 17, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
Enhancing the Analysis of U.S. State and Local Government Pension Obligations