Alaska (State of )
Transcript Of Alaska (State of )
U.S. PUBLIC FINANCE
CREDIT OPINION
4 May 2021
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Alaska (State of)
Update to credit analysis after outlook revision to stable
Summary
The State of Alaska's Aa3 general obligation rating and stable outlook incorporate the positive revenue effects of stabilizing oil prices and the state's ability to fund operations partly using earnings of the massive Alaska Permanent Fund, which has gained about 15% over the past two years.1 Also factored into our analysis are a narrow economy dependent on the petroleum industry and high unfunded pension liabilities, challenges mitigated respectively by the state's ability to draw on permanent fund profits for operating needs and by comparatively low fixed costs. Efforts to augment resident dividend payments, which are also derived from Alaska Permanent Fund earnings, could pose a risk to the state’s fiscal stabilization, however. Reliance on the permanent fund exposes the state to a degree of financial market risk, although the fund's immense size (see Exhibit 1) and the state's current strategy of structured draws based on a moving average value of fund assets should offset this vulnerability. The state's ratings were affirmed and its outlook was revised to stable from negative on April 22.
Exhibit 1
Permanent Fund growth has persisted in recent years
Principal $90
Earnings Reserve Account
Billions
$80
$70
$60
$50
$40
$30
$20
$10
$-
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
The amounts for 2021 reflect market valuations as of March 31, 2021. Source: Alaska Permanent Fund Corporation
Credit strengths
» Considerable liquid reserves, despite continued reliance on reserves to help fund operations in recent years
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» Ability to achieve structural balance through structured draws on Permanent Fund earnings and economic capacity for taxation
Credit challenges
» Elevated economic and revenue exposure to oil price and production trends » Exposure to volatility in Permanent Fund's annual investment returns » Comparatively large pension burden
Rating outlook
Revision of the outlook to stable from negative is supported by Alaska's near-term path toward meeting its operating budget needs using moderate and sustainable draws on the Permanent Fund's Earnings Reserve Account, in conjunction with revenue from oil production and other sources.
Factors that could lead to an upgrade
» Demonstration of ability to fund operations from recurring resources through economic cycles » Reduction in unfunded pension liabilities » Implementation of broad-based taxes or other fiscal strategies that help the state's transition from reliance on oil revenue
Factors that could lead to a downgrade
» Accelerating depletion of Permanent Fund earnings reserve as a consequence of draws beyond structured amounts contemplated in current state laws
» Significant worsening of unfunded pension liabilities
Key indicators
Exhibit 2
Alaska (State of)
Operating Fund Revenues (000s) Available Balances as % of Operating Fund Revenues Nominal GDP (billions) Nominal GDP Growth Total Non-Farm Employment Growth Fixed Costs as % of Own-Source Revenue Adjusted Net Pension Liabilities (000s) Net Tax-Supported Debt (000s) (Adjusted Net Pension Liability + Net Tax-Supported Debt) / GDP
2016
$2,251,963 786.6% $49.8 -1.9% -1.7% 11.7%
$10,869,964 $1,254,600 24.4%
2017
$2,216,417 853.0% $51.7 4.0% -1.3% 9.1%
$11,983,989 $1,164,500 25.4%
2018
$3,785,265 527.6% $54.3 4.9% -0.4% 7.5%
$12,516,054 $1,081,100 25.0%
Source: State audited financial statements; US Bureau of Economic Analysis; US Bureau of Labor Statistics; Moody's Investors Service
2019
$7,296,974 236.9% $54.4 0.2% 0.7% 6.5%
$10,964,439 $899,200 21.8%
50-State Median
2020
(2019)
$5,428,031 $12,439,906
243.7%
9.1%
$50.2
$250.6
-7.6%
3.6%
-8.5%
0.9%
NA
7.8%
NA $11,258,253
NA $3,864,531
NA
6.9%
Profile
Alaska is by far the largest state in geographic terms. Alaska encompasses 586,412 square miles, making it a fifth as large as the other 49 states combined. The state’s economy is comparatively small, with GDP of $50 billion in 2020. It is also among the least populous states. According to the 2020 Census, Alaska's 733,391 population was less than all other states except for the two smallest: Vermont and Wyoming. Alaska has vast natural resources that include oil and gas, and deposits of gold, zinc, lead and copper. For oil, it ranked as the sixth-largest producer among states in 2019, according to the US Energy Information Administration.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
2 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable
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Detailed credit considerations
Economy Recovering oil prices and massive federal stimulus will help revive Alaska's economic growth in coming months. Despite declining oil production, the petroleum sector will stay largely in control of the state's economic conditions. In a state where about one-quarter of GDP is derived from natural resources (see left exhibit), Alaska is positioned to benefit from (or to be undermined by) the global petroleum market's supply and demand dynamics. As shown below on the right, annual changes in state economic output are more closely aligned with oil prices than with US GDP growth.
Exhibit 3
Petroleum and other natural resources account for a large share of state GDP
All other 29%
Mining, natural resources 26%
Exhibit 4
Alaska's GDP often tracks oil prices (right axis) rather than national growth
15%
Alaska GDP
US GDP
ANS (right axis) $120
10%
$100
5%
$80
0%
$60
Finance,
insurance real
estate
11% Professional and
business
Education and
services
heatlh
6%
7%
Government 18%
Hospitality, arts &c 3%
Reflects 10-year averages of real GDP components. Source: US Bureau of Economic Analysis
-5%
$40
-10%
$20
-15%
$-
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Oil prices reflect Alaska North Slope annual average per-barrel price; US and Alaska change in current dollar GDP. Sources: US Bureau of Economic Analysis, Alaska Department of Revenue
The state's worst GDP performance occurs in years when oil prices – governed by global supply and demand factors – fall. As shown in the exhibit above, Alaska's GDP contracted sharply from 2013 through 2015, while oil prices tumbled and the national economy kept growing. One reason for the correlation between oil prices and Alaska's GDP is that the value of petroleum produced factors into GDP. Further, oil's multiplier effects drive the state's output in other economic sectors. The state's personal income, which is high relative to the US on a per-capita basis, also can diverge from national trends.
Exhibit 5
Alaska's current low ratio of state and local taxes to personal income shows economic capacity
16% 14% 12% 10%
8% 6% 4% 2% 0%
State and local tax data are from fiscal periods ending in the year after July 1, 2018. Source: US Census Bureau
3 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable
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As shown in the exhibit above, Alaska's economy provides capacity to raise revenue from broad consumer taxes, if the state chooses to implement them. State and local taxes account for a very small share of Alaska's total personal income compared with other states.
Because it levies no broad income or sales taxes on consumers, Alaska's credit standing has been less closely linked to economic performance as measured by common metrics, like total non-farm payroll employment, than is the case for other states, which generally apply taxes to wages, general retail transactions, or both.2
Finances and Liquidity Like the economy, Alaska's finances will benefit from more stable petroleum industry conditions, federal aid and the social and commercial trends that should accompany successful vaccination efforts.3 Higher oil prices alone will only go so far. In its Fall Revenue Sources Book, the state indicated that fiscal 2022 unrestricted general fund revenue would total approximately $1.7 billion at the now current price of about $65 per barrel.4 While this amounts to about $500 million more than the state expected at the price prevailing when the forecast was completed ($48 per barrel), it would remain well short of operating revenue that Alaska collected in prior years.
Alaska has relied largely on oil-related taxes and royalties to fund government programs since its 1980 decision to abolish the personal income tax and take advantage of growing oil production at Prudhoe Bay and other North Slope locations. Alaska imposes various levies and charges on petroleum production companies: property taxes applied to extraction and processing equipment and pipelines; a corporate income tax; production taxes, and rents and royalties for drilling rights. Reliance on the oil industry's growth and profitability left the state vulnerable to both the gradual depletion of oil fields over time and to oil price volatility.
Alaska's revenue volatility is a challenge, but it has brought occasional windfalls. In 2008, the state collected $9.96 billion from petroleum sources, far more than needed for a year's operations and enough to completely repay what it had drawn from its Constitutional Budget Reserve Fund (CBRF) and also to replenish its Statutory Budget Reserve Fund (SBRF). Those two reserves remained strong for several years, containing about $16 billion at the end of fiscal 2012 and 2013. As oil prices, and the state's revenue, tumbled from the 2012 peaks, Alaska began to spend those reserves for operating needs. As shown below, the state's unrestricted general fund revenue (excluding reserve draws) averaged $1.9 billion in fiscal 2015 through 2018. Because the available revenue from the state's normal operating sources compared with annual expenditures of about $4.6 billion in the period, Alaska relied on reserve funds. The SBRF is completely depleted, and the CBRF had a $1.07 billion cash balance as of March 31.
Exhibit 6
General fund revenue decline tracked drop in oil prices
GF unrestricted petroleum
Other GF unrestricted sources
$10
$9
$8
$7
$6
Billions
$5
$4
$3
$2
$1
$2009
2010
2011
2012
2013
2014
Source: Annual Fall Revenue Sources books, Alaska Department of Revenue.
Earnings Reserve Account transfer
2015
2016
2017
Oil Price (right axis)
2018
2019
$120 $100 $80 $60 $40 $20 $0 2020
Since fiscal 2019, the state has used investment earnings of the Permanent Fund (shown in the dark blue area above) to offset its loss of recurring oil revenue. Under a 2018 law known as SB 26, the state systematically withdraws some of the Permanent Fund's total market value from the fund's Earnings Reserve Account (ERA) for various purposes.5 The law sets the withdrawal amount as a percentage of the Permanent Fund's average value in the first five of the preceding six fiscal years. State policymakers set the percentage of market value (or POMV) at 5.25% initially and at 5% as of July 1, 2021 – a portion that should be sustainable for the fund. Assuming the state does not exceed the limits in SB 26, a significant reduction in the fund's value would be caused by extended underperformance of investments rather than POMV withdrawals.
4 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable
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Given the fund's current size and the state's budget, regular POMV draws should address the bulk of state operating revenue needs near term. The state's spring revenue forecast indicates that Permanent Fund earnings will provide almost $3.1 billion in both the current and coming fiscal years (ending June 30), accounting for about two-thirds of unrestricted general fund revenue. The ERA receives realized investment gains as well as interest and dividend payments from the fund's investments. The state constitution allows only such investment earnings (not the principal or fund “corpus”) to be appropriated. The state's investment-linked revenue model entails financial market risk, because it relies on the availability of unrealized gains to replenish the ERA. The current amount of unrealized gains in the fund is $12.2 billion.
SB 26 does not address how ERA draws should be allocated between state operating needs and payments of Permanent Fund dividends to residents. A desire to pay out larger dividends would threaten to deplete the ERA if it serves as the basis for draws exceeding the 5% POMV calculation. While Alaska's governor has advocated payment of larger dividends, state legislators on balance have opposed this approach. The governor is now advocating a constitutional measure that would formalize the 5% POMV as the maximum permissible withdrawal in any year, and a law that would provide for a “fair split” (50% each) of such draws between citizen dividends and state operating needs.6
Oil is unlikely to provide windfalls similar to those of the past because of changes made to production tax policy. By 2012, the state had taken several steps to encourage producers to develop new oil fields and prolong the life of existing ones on the North Slope. These included removing increased production tax rates that kicked in at higher oil price levels and providing more generous tax credits to producers. The state owed producers about $733 million as of January 1. In part because of the incentives it has provided, the state projects that its oil output will stabilize and even improve in coming years. The most recent forecast shows fiscal 2030 oil production up 20% compared with actual 2020 production. Even if this forecast proves correct, the state's oil revenue is unlikely to regain levels that would end the need to rely on POMV draws or other resources.
Liquidity Alaska's liquidity has been very strong, as a consequence of budgetary reserve funds and the Permanent Fund ERA discussed above. The Earnings Reserve Account, available through legislative appropriation, contained about $17.3 billion as of March 31, according to the Permanent Fund Corporation, including the amounts allocated for state expenditure in the current and coming fiscal years. The depletion of Alaska's traditional budgetary reserve funds that began in fiscal 2013 was driven by declining oil revenue during that period, and the lack of an offsetting strategy to achieve fiscal balance. As shown in the chart below, the state still has ample liquidity, based on the Permanent Fund's ERA. Replenishment of the state's traditional budgetary reserves would be credit positive, providing increased flexibility and helping offset vulnerability to investment losses in the Permanent Fund.
Exhibit 7
Liquidity remains ample, despite depletion of the state's traditional budgetary reserves
Constitutional Budget Reserve Fund (CBRF)
$25
Permanent Fund Earnings Reserve Account
Statutory Budget Reserve Fund (SBRF) Unrestricted GF revenue
$5
$-
2011
2012
2013
Billions
$20
$15
$10
$5
$2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Fiscal 2021 numbers are based on current values (as of March 31), while prior years reflect values as of the June 30 year end Source: State of Alaska Department of Revenue, Treasury Division; Alaska Permanent Fund Corporation.
5 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable
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Debt and Pensions Alaska's long-term liabilities are elevated because of the state's large, unfunded liabilities for retirement benefits. Liabilities based solely on the general obligation and appropriation bonds that make up Alaska's net tax-supported debt are comparatively modest. Since last year, when the state completed repayment of bonds secured by sport fishing license fees and surcharges, its net tax-supported debt has consisted only of GO and state appropriation bonds. Issuance of general obligation bonds requires approval from the legislature and from a simple majority in a public vote. The state has no remaining authority to issue GO bonds. The current net tax-supported debt total represents a decline of 25% compared with the comparable figure four years earlier.
Exhibit 8
Net tax-supported debt consists of GOs and a modest share of appropriation bonds
Type
General Obligation bonds Appropriation debt (Total) Total net tax-supported debt Alaska Municipal Bond Bank (appropriation/moral obligation) Alaska Energy Authority (state moral obligation)
The Bond Bank and Alaska Energy Authority bonds are included in gross debt but excluded from net tax-supported debt. Source: Alaska Public Debt, January 2021; State of Alaska Department of Revenue
Amount
$624,900,000 $203,180,000 $828,080,000 $1,034,200,000
$63,700,000
Legal security Alaska’s general obligation debt is secured by a pledge of the state’s full faith, credit and resources. Under Alaska’s constitution, GOs require approval from voters, in addition to the legislature, and must be issued for capital improvements.
Debt structure As shown in the debt table above, Alaska has subject-to-appropriation debt of about $203 million. This includes bonds issued for two essential government projects: the Alaska Native Tribal Healthcare Consortium's residential facility for natives receiving medical care in Anchorage and the Goose Creek Correctional Facility located in the Matanuska-Susitna Borough. Alaska also has substantial contingent liabilities for other obligations: $1.03 billion of Alaska Municipal Bond Bank bonds backed by local government loans and about $64 million of Alaska Energy Authority debt supported by hydroelectric project revenue and the state's moral obligation.
The state's plan to issue up to $1 billion of appropriation bonds to facilitate payment of tax credits owed to North Slope oil producers was derailed by a state Supreme Court ruling in September.7 While assenting to the state's existing lease-appropriation bonds, the court ruled that the state's proposed tax credit financing was unconstitutional.
Debt-related derivatives The state is not a party to any debt-related derivatives.
Pensions and OPEB Alaska's unfunded pension liabilities rank among the highest of the 50 states in relation to capacity to pay, whether based on the state's GDP or its own-source revenue. Alaska's adjusted net pension liability (ANPL) amounted to $10.97 billion in 2019, as shown in Exhibit 2. When added to net tax supported debt of almost $900 million, the state's long-term liabilities equal 21.8% of 2019 GDP. The state's constitution includes a pension benefit protection clause covering public retirement plans' pension and other post-employment benefits (or OPEB, primarily for healthcare), although it only applies to already accrued benefits. 8 Alaska's fixed cost ratio (including debt service, pension contributions and retiree health benefits) is modest, at about 6.5% based on the most recent available data, mitigating the credit effects of the state's large unfunded pension liabilities.
ESG considerations
Environmental As a state that has a high reliance on the continuing consumption of fossil fuels, Alaska faces perhaps more economic vulnerability to carbon transition than any other state. At the same time, Alaska’s physical exposure to climate change-induced factors such as hurricanes and sea level rise is very low compared with other states, according to the climate risk areas tracked by our affiliate Four Twenty Seven. The Alaska state government takes responsibility for many small, dispersed indigenous communities, as demonstrated
6 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable
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by its recent (and largely successful) efforts to vaccinate indigenous populations. The expense of this responsibility could increase substantially for the state if it needs to relocate Alaska native villages that have been hurt by the effects of climate change.
Social Alaska has one of the smallest populations among the 50 states, and its population trends have been among the weakest in recent years. The state’s population growth in the five years through 2020 ranked 46th, with a 1% decline; the median population change for states in the period was positive 1.4%.9 Alaska has lost population for four consecutive years and is one of seven states currently experiencing population losses over four or more years in a row, according to Census Bureau estimates through 2020. On the positive side, Alaska’s share of residents 65 or older remains comparatively low (at 12.52% as of 2019, versus the nation’s 16.47%). The state has historically benefitted from better labor force participation than the nation, and it features less income inequality, perhaps because of the Permanent Fund dividend program. Alaska has a Gini index of 0.43 compared with the nation’s 0.48 (as of 2019). The state's social profile also incorporates relative weakness in housing, health and safety and access to basic services.
Governance The state’s constitution currently has no revenue raising caps, mandated spending levels or supermajority vote requirements for budget passage or tax increases, giving the government flexibility to increase revenue and cut spending when needed. There is no legal barrier to imposing broad-based income or sales taxes, although the lack of such taxes for many decades poses a significant political barrier. The governor has the power to impose budget cuts through line-item vetoes, providing a fiscal management strategy during economic downturns. The state uses multi-year financial plans and consensus revenue forecasts. It has no recent history of delayed budget adoption or significantly delayed release of audited financial reports (although audits have sometimes been published later than the state's statutory target deadline of December 15 after the June 30 fiscal year end).
Governor Mike Dunleavy has advocated certain constitutional amendments that would reduce the state’s financial flexibility, such as providing for automatic payment of Permanent Fund Dividend checks, without legislative appropriation, and subjecting any tax increase to approval by a public vote. These proposals do not appear likely to be enacted in the near term, however.
7 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable
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Rating methodology and scorecard factors
The US States and Territories Rating Methodology includes a scorecard, which summarizes the 10 rating factors generally most important to state and territory credit profiles. Because the scorecard is a summary, and may not include every consideration in the credit analysis of a specific issuer, a scorecard-indicated outcome may or may not map closely to the actual rating assigned.
Exhibit 9
US states and territories rating methodology scorecard State of Alaska
Rating Factors
Factor 1: Economy (25%) a) Per Capita Income Relative to US Average [1] b) Nominal Gross Domestic Product ($ billions) [1]
Factor 2: Finances (30%) a) Structural Balance b) Fixed Costs / State Own-Source Revenue [2] c) Liquidity and Fund Balance
Factor 3: Governance (20%) a) Governance / Constitutional Framework
Factor 4: Debt and Pensions (25%) a) (Moody's ANPL + Net Tax-Supported Debt) / State GDP [2] [3]
Factors 5 - 10: Notching Factors [4] Adjustments Up: Financial Stability Adjustments Down: Economic or Revenue Concentration or Volatility
Rating: a) Scorecard-Indicated Outcome b) Actual Rating Assigned
Measure
111.2% $50.2
A 6.5% Aaa
A
21.8%
1 -1
[1]Economy measures are based on data from the most recent year available. [2] Fixed costs and debt and pensions measures are based on data from the most recent debt and pensions medians report published by Moody’s. [3] ANPL stands for adjusted net pension liability. [4] Notching factors 5-10 are specifically defined in the US States and Territories Rating Methodology. Sources: US Bureau of Economic Analysis, state audited financial statements, Moody’s Investors Service
Score
Aaa Aa A Aa Aaa A A
Aa3 Aa3
Endnotes
1 This calculation is based on the Permanent Fund's $76.3 billion value as of March 31, 2021 compared with $66.3 billion as of June 30, 2019.
2 Alaska is the only US state not to levy broad taxes on either retail sales or individual income. The state is one of five that do not impose a broad sales and use tax and one of nine with no tax on wages and salaries.
3 According to the Alaska Department of Health and Social Services, almost 35% of all Alaskans had been fully vaccinated as of May 3, exceeding the 31.8% national percentage reported by the Centers for Disease Control and Prevention.
4 This revenue represents the average of the revenue projections at $60 per barrel and $70 per barrel. The projection assumes that average daily production will decline by about 8%, to 439,600 barrels per day, during the coming year.
5 Prior to SB 26, the legislature only appropriated from the ERA to pay dividends to Alaska residents or to make “inflation-proofing” deposits to the fund's principal.
6 “FY 2022 Budget Overview and 10-Year Plan,” Office of Budget and Management, Office of Governor Mike Dunleavy; December 11, 2020
7 Eric Forrer v. State of Alaska; Supreme Court of the State of Alaska, No. S-17377; 4 September 2020.
8 The Constitution of the State of Alaska, Article XII, Sect. 7.
9 Unlike the population figure cited in the “Profile” section on page 2, these numbers are taken from the Census Bureau's annual estimates data rather than from the actual 2020 census.
8 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable
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Alaska (State of)
Update to credit analysis after outlook revision to stable
Summary
The State of Alaska's Aa3 general obligation rating and stable outlook incorporate the positive revenue effects of stabilizing oil prices and the state's ability to fund operations partly using earnings of the massive Alaska Permanent Fund, which has gained about 15% over the past two years.1 Also factored into our analysis are a narrow economy dependent on the petroleum industry and high unfunded pension liabilities, challenges mitigated respectively by the state's ability to draw on permanent fund profits for operating needs and by comparatively low fixed costs. Efforts to augment resident dividend payments, which are also derived from Alaska Permanent Fund earnings, could pose a risk to the state’s fiscal stabilization, however. Reliance on the permanent fund exposes the state to a degree of financial market risk, although the fund's immense size (see Exhibit 1) and the state's current strategy of structured draws based on a moving average value of fund assets should offset this vulnerability. The state's ratings were affirmed and its outlook was revised to stable from negative on April 22.
Exhibit 1
Permanent Fund growth has persisted in recent years
Principal $90
Earnings Reserve Account
Billions
$80
$70
$60
$50
$40
$30
$20
$10
$-
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
The amounts for 2021 reflect market valuations as of March 31, 2021. Source: Alaska Permanent Fund Corporation
Credit strengths
» Considerable liquid reserves, despite continued reliance on reserves to help fund operations in recent years
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» Ability to achieve structural balance through structured draws on Permanent Fund earnings and economic capacity for taxation
Credit challenges
» Elevated economic and revenue exposure to oil price and production trends » Exposure to volatility in Permanent Fund's annual investment returns » Comparatively large pension burden
Rating outlook
Revision of the outlook to stable from negative is supported by Alaska's near-term path toward meeting its operating budget needs using moderate and sustainable draws on the Permanent Fund's Earnings Reserve Account, in conjunction with revenue from oil production and other sources.
Factors that could lead to an upgrade
» Demonstration of ability to fund operations from recurring resources through economic cycles » Reduction in unfunded pension liabilities » Implementation of broad-based taxes or other fiscal strategies that help the state's transition from reliance on oil revenue
Factors that could lead to a downgrade
» Accelerating depletion of Permanent Fund earnings reserve as a consequence of draws beyond structured amounts contemplated in current state laws
» Significant worsening of unfunded pension liabilities
Key indicators
Exhibit 2
Alaska (State of)
Operating Fund Revenues (000s) Available Balances as % of Operating Fund Revenues Nominal GDP (billions) Nominal GDP Growth Total Non-Farm Employment Growth Fixed Costs as % of Own-Source Revenue Adjusted Net Pension Liabilities (000s) Net Tax-Supported Debt (000s) (Adjusted Net Pension Liability + Net Tax-Supported Debt) / GDP
2016
$2,251,963 786.6% $49.8 -1.9% -1.7% 11.7%
$10,869,964 $1,254,600 24.4%
2017
$2,216,417 853.0% $51.7 4.0% -1.3% 9.1%
$11,983,989 $1,164,500 25.4%
2018
$3,785,265 527.6% $54.3 4.9% -0.4% 7.5%
$12,516,054 $1,081,100 25.0%
Source: State audited financial statements; US Bureau of Economic Analysis; US Bureau of Labor Statistics; Moody's Investors Service
2019
$7,296,974 236.9% $54.4 0.2% 0.7% 6.5%
$10,964,439 $899,200 21.8%
50-State Median
2020
(2019)
$5,428,031 $12,439,906
243.7%
9.1%
$50.2
$250.6
-7.6%
3.6%
-8.5%
0.9%
NA
7.8%
NA $11,258,253
NA $3,864,531
NA
6.9%
Profile
Alaska is by far the largest state in geographic terms. Alaska encompasses 586,412 square miles, making it a fifth as large as the other 49 states combined. The state’s economy is comparatively small, with GDP of $50 billion in 2020. It is also among the least populous states. According to the 2020 Census, Alaska's 733,391 population was less than all other states except for the two smallest: Vermont and Wyoming. Alaska has vast natural resources that include oil and gas, and deposits of gold, zinc, lead and copper. For oil, it ranked as the sixth-largest producer among states in 2019, according to the US Energy Information Administration.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
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Detailed credit considerations
Economy Recovering oil prices and massive federal stimulus will help revive Alaska's economic growth in coming months. Despite declining oil production, the petroleum sector will stay largely in control of the state's economic conditions. In a state where about one-quarter of GDP is derived from natural resources (see left exhibit), Alaska is positioned to benefit from (or to be undermined by) the global petroleum market's supply and demand dynamics. As shown below on the right, annual changes in state economic output are more closely aligned with oil prices than with US GDP growth.
Exhibit 3
Petroleum and other natural resources account for a large share of state GDP
All other 29%
Mining, natural resources 26%
Exhibit 4
Alaska's GDP often tracks oil prices (right axis) rather than national growth
15%
Alaska GDP
US GDP
ANS (right axis) $120
10%
$100
5%
$80
0%
$60
Finance,
insurance real
estate
11% Professional and
business
Education and
services
heatlh
6%
7%
Government 18%
Hospitality, arts &c 3%
Reflects 10-year averages of real GDP components. Source: US Bureau of Economic Analysis
-5%
$40
-10%
$20
-15%
$-
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Oil prices reflect Alaska North Slope annual average per-barrel price; US and Alaska change in current dollar GDP. Sources: US Bureau of Economic Analysis, Alaska Department of Revenue
The state's worst GDP performance occurs in years when oil prices – governed by global supply and demand factors – fall. As shown in the exhibit above, Alaska's GDP contracted sharply from 2013 through 2015, while oil prices tumbled and the national economy kept growing. One reason for the correlation between oil prices and Alaska's GDP is that the value of petroleum produced factors into GDP. Further, oil's multiplier effects drive the state's output in other economic sectors. The state's personal income, which is high relative to the US on a per-capita basis, also can diverge from national trends.
Exhibit 5
Alaska's current low ratio of state and local taxes to personal income shows economic capacity
16% 14% 12% 10%
8% 6% 4% 2% 0%
State and local tax data are from fiscal periods ending in the year after July 1, 2018. Source: US Census Bureau
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As shown in the exhibit above, Alaska's economy provides capacity to raise revenue from broad consumer taxes, if the state chooses to implement them. State and local taxes account for a very small share of Alaska's total personal income compared with other states.
Because it levies no broad income or sales taxes on consumers, Alaska's credit standing has been less closely linked to economic performance as measured by common metrics, like total non-farm payroll employment, than is the case for other states, which generally apply taxes to wages, general retail transactions, or both.2
Finances and Liquidity Like the economy, Alaska's finances will benefit from more stable petroleum industry conditions, federal aid and the social and commercial trends that should accompany successful vaccination efforts.3 Higher oil prices alone will only go so far. In its Fall Revenue Sources Book, the state indicated that fiscal 2022 unrestricted general fund revenue would total approximately $1.7 billion at the now current price of about $65 per barrel.4 While this amounts to about $500 million more than the state expected at the price prevailing when the forecast was completed ($48 per barrel), it would remain well short of operating revenue that Alaska collected in prior years.
Alaska has relied largely on oil-related taxes and royalties to fund government programs since its 1980 decision to abolish the personal income tax and take advantage of growing oil production at Prudhoe Bay and other North Slope locations. Alaska imposes various levies and charges on petroleum production companies: property taxes applied to extraction and processing equipment and pipelines; a corporate income tax; production taxes, and rents and royalties for drilling rights. Reliance on the oil industry's growth and profitability left the state vulnerable to both the gradual depletion of oil fields over time and to oil price volatility.
Alaska's revenue volatility is a challenge, but it has brought occasional windfalls. In 2008, the state collected $9.96 billion from petroleum sources, far more than needed for a year's operations and enough to completely repay what it had drawn from its Constitutional Budget Reserve Fund (CBRF) and also to replenish its Statutory Budget Reserve Fund (SBRF). Those two reserves remained strong for several years, containing about $16 billion at the end of fiscal 2012 and 2013. As oil prices, and the state's revenue, tumbled from the 2012 peaks, Alaska began to spend those reserves for operating needs. As shown below, the state's unrestricted general fund revenue (excluding reserve draws) averaged $1.9 billion in fiscal 2015 through 2018. Because the available revenue from the state's normal operating sources compared with annual expenditures of about $4.6 billion in the period, Alaska relied on reserve funds. The SBRF is completely depleted, and the CBRF had a $1.07 billion cash balance as of March 31.
Exhibit 6
General fund revenue decline tracked drop in oil prices
GF unrestricted petroleum
Other GF unrestricted sources
$10
$9
$8
$7
$6
Billions
$5
$4
$3
$2
$1
$2009
2010
2011
2012
2013
2014
Source: Annual Fall Revenue Sources books, Alaska Department of Revenue.
Earnings Reserve Account transfer
2015
2016
2017
Oil Price (right axis)
2018
2019
$120 $100 $80 $60 $40 $20 $0 2020
Since fiscal 2019, the state has used investment earnings of the Permanent Fund (shown in the dark blue area above) to offset its loss of recurring oil revenue. Under a 2018 law known as SB 26, the state systematically withdraws some of the Permanent Fund's total market value from the fund's Earnings Reserve Account (ERA) for various purposes.5 The law sets the withdrawal amount as a percentage of the Permanent Fund's average value in the first five of the preceding six fiscal years. State policymakers set the percentage of market value (or POMV) at 5.25% initially and at 5% as of July 1, 2021 – a portion that should be sustainable for the fund. Assuming the state does not exceed the limits in SB 26, a significant reduction in the fund's value would be caused by extended underperformance of investments rather than POMV withdrawals.
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Given the fund's current size and the state's budget, regular POMV draws should address the bulk of state operating revenue needs near term. The state's spring revenue forecast indicates that Permanent Fund earnings will provide almost $3.1 billion in both the current and coming fiscal years (ending June 30), accounting for about two-thirds of unrestricted general fund revenue. The ERA receives realized investment gains as well as interest and dividend payments from the fund's investments. The state constitution allows only such investment earnings (not the principal or fund “corpus”) to be appropriated. The state's investment-linked revenue model entails financial market risk, because it relies on the availability of unrealized gains to replenish the ERA. The current amount of unrealized gains in the fund is $12.2 billion.
SB 26 does not address how ERA draws should be allocated between state operating needs and payments of Permanent Fund dividends to residents. A desire to pay out larger dividends would threaten to deplete the ERA if it serves as the basis for draws exceeding the 5% POMV calculation. While Alaska's governor has advocated payment of larger dividends, state legislators on balance have opposed this approach. The governor is now advocating a constitutional measure that would formalize the 5% POMV as the maximum permissible withdrawal in any year, and a law that would provide for a “fair split” (50% each) of such draws between citizen dividends and state operating needs.6
Oil is unlikely to provide windfalls similar to those of the past because of changes made to production tax policy. By 2012, the state had taken several steps to encourage producers to develop new oil fields and prolong the life of existing ones on the North Slope. These included removing increased production tax rates that kicked in at higher oil price levels and providing more generous tax credits to producers. The state owed producers about $733 million as of January 1. In part because of the incentives it has provided, the state projects that its oil output will stabilize and even improve in coming years. The most recent forecast shows fiscal 2030 oil production up 20% compared with actual 2020 production. Even if this forecast proves correct, the state's oil revenue is unlikely to regain levels that would end the need to rely on POMV draws or other resources.
Liquidity Alaska's liquidity has been very strong, as a consequence of budgetary reserve funds and the Permanent Fund ERA discussed above. The Earnings Reserve Account, available through legislative appropriation, contained about $17.3 billion as of March 31, according to the Permanent Fund Corporation, including the amounts allocated for state expenditure in the current and coming fiscal years. The depletion of Alaska's traditional budgetary reserve funds that began in fiscal 2013 was driven by declining oil revenue during that period, and the lack of an offsetting strategy to achieve fiscal balance. As shown in the chart below, the state still has ample liquidity, based on the Permanent Fund's ERA. Replenishment of the state's traditional budgetary reserves would be credit positive, providing increased flexibility and helping offset vulnerability to investment losses in the Permanent Fund.
Exhibit 7
Liquidity remains ample, despite depletion of the state's traditional budgetary reserves
Constitutional Budget Reserve Fund (CBRF)
$25
Permanent Fund Earnings Reserve Account
Statutory Budget Reserve Fund (SBRF) Unrestricted GF revenue
$5
$-
2011
2012
2013
Billions
$20
$15
$10
$5
$2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Fiscal 2021 numbers are based on current values (as of March 31), while prior years reflect values as of the June 30 year end Source: State of Alaska Department of Revenue, Treasury Division; Alaska Permanent Fund Corporation.
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Debt and Pensions Alaska's long-term liabilities are elevated because of the state's large, unfunded liabilities for retirement benefits. Liabilities based solely on the general obligation and appropriation bonds that make up Alaska's net tax-supported debt are comparatively modest. Since last year, when the state completed repayment of bonds secured by sport fishing license fees and surcharges, its net tax-supported debt has consisted only of GO and state appropriation bonds. Issuance of general obligation bonds requires approval from the legislature and from a simple majority in a public vote. The state has no remaining authority to issue GO bonds. The current net tax-supported debt total represents a decline of 25% compared with the comparable figure four years earlier.
Exhibit 8
Net tax-supported debt consists of GOs and a modest share of appropriation bonds
Type
General Obligation bonds Appropriation debt (Total) Total net tax-supported debt Alaska Municipal Bond Bank (appropriation/moral obligation) Alaska Energy Authority (state moral obligation)
The Bond Bank and Alaska Energy Authority bonds are included in gross debt but excluded from net tax-supported debt. Source: Alaska Public Debt, January 2021; State of Alaska Department of Revenue
Amount
$624,900,000 $203,180,000 $828,080,000 $1,034,200,000
$63,700,000
Legal security Alaska’s general obligation debt is secured by a pledge of the state’s full faith, credit and resources. Under Alaska’s constitution, GOs require approval from voters, in addition to the legislature, and must be issued for capital improvements.
Debt structure As shown in the debt table above, Alaska has subject-to-appropriation debt of about $203 million. This includes bonds issued for two essential government projects: the Alaska Native Tribal Healthcare Consortium's residential facility for natives receiving medical care in Anchorage and the Goose Creek Correctional Facility located in the Matanuska-Susitna Borough. Alaska also has substantial contingent liabilities for other obligations: $1.03 billion of Alaska Municipal Bond Bank bonds backed by local government loans and about $64 million of Alaska Energy Authority debt supported by hydroelectric project revenue and the state's moral obligation.
The state's plan to issue up to $1 billion of appropriation bonds to facilitate payment of tax credits owed to North Slope oil producers was derailed by a state Supreme Court ruling in September.7 While assenting to the state's existing lease-appropriation bonds, the court ruled that the state's proposed tax credit financing was unconstitutional.
Debt-related derivatives The state is not a party to any debt-related derivatives.
Pensions and OPEB Alaska's unfunded pension liabilities rank among the highest of the 50 states in relation to capacity to pay, whether based on the state's GDP or its own-source revenue. Alaska's adjusted net pension liability (ANPL) amounted to $10.97 billion in 2019, as shown in Exhibit 2. When added to net tax supported debt of almost $900 million, the state's long-term liabilities equal 21.8% of 2019 GDP. The state's constitution includes a pension benefit protection clause covering public retirement plans' pension and other post-employment benefits (or OPEB, primarily for healthcare), although it only applies to already accrued benefits. 8 Alaska's fixed cost ratio (including debt service, pension contributions and retiree health benefits) is modest, at about 6.5% based on the most recent available data, mitigating the credit effects of the state's large unfunded pension liabilities.
ESG considerations
Environmental As a state that has a high reliance on the continuing consumption of fossil fuels, Alaska faces perhaps more economic vulnerability to carbon transition than any other state. At the same time, Alaska’s physical exposure to climate change-induced factors such as hurricanes and sea level rise is very low compared with other states, according to the climate risk areas tracked by our affiliate Four Twenty Seven. The Alaska state government takes responsibility for many small, dispersed indigenous communities, as demonstrated
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by its recent (and largely successful) efforts to vaccinate indigenous populations. The expense of this responsibility could increase substantially for the state if it needs to relocate Alaska native villages that have been hurt by the effects of climate change.
Social Alaska has one of the smallest populations among the 50 states, and its population trends have been among the weakest in recent years. The state’s population growth in the five years through 2020 ranked 46th, with a 1% decline; the median population change for states in the period was positive 1.4%.9 Alaska has lost population for four consecutive years and is one of seven states currently experiencing population losses over four or more years in a row, according to Census Bureau estimates through 2020. On the positive side, Alaska’s share of residents 65 or older remains comparatively low (at 12.52% as of 2019, versus the nation’s 16.47%). The state has historically benefitted from better labor force participation than the nation, and it features less income inequality, perhaps because of the Permanent Fund dividend program. Alaska has a Gini index of 0.43 compared with the nation’s 0.48 (as of 2019). The state's social profile also incorporates relative weakness in housing, health and safety and access to basic services.
Governance The state’s constitution currently has no revenue raising caps, mandated spending levels or supermajority vote requirements for budget passage or tax increases, giving the government flexibility to increase revenue and cut spending when needed. There is no legal barrier to imposing broad-based income or sales taxes, although the lack of such taxes for many decades poses a significant political barrier. The governor has the power to impose budget cuts through line-item vetoes, providing a fiscal management strategy during economic downturns. The state uses multi-year financial plans and consensus revenue forecasts. It has no recent history of delayed budget adoption or significantly delayed release of audited financial reports (although audits have sometimes been published later than the state's statutory target deadline of December 15 after the June 30 fiscal year end).
Governor Mike Dunleavy has advocated certain constitutional amendments that would reduce the state’s financial flexibility, such as providing for automatic payment of Permanent Fund Dividend checks, without legislative appropriation, and subjecting any tax increase to approval by a public vote. These proposals do not appear likely to be enacted in the near term, however.
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Rating methodology and scorecard factors
The US States and Territories Rating Methodology includes a scorecard, which summarizes the 10 rating factors generally most important to state and territory credit profiles. Because the scorecard is a summary, and may not include every consideration in the credit analysis of a specific issuer, a scorecard-indicated outcome may or may not map closely to the actual rating assigned.
Exhibit 9
US states and territories rating methodology scorecard State of Alaska
Rating Factors
Factor 1: Economy (25%) a) Per Capita Income Relative to US Average [1] b) Nominal Gross Domestic Product ($ billions) [1]
Factor 2: Finances (30%) a) Structural Balance b) Fixed Costs / State Own-Source Revenue [2] c) Liquidity and Fund Balance
Factor 3: Governance (20%) a) Governance / Constitutional Framework
Factor 4: Debt and Pensions (25%) a) (Moody's ANPL + Net Tax-Supported Debt) / State GDP [2] [3]
Factors 5 - 10: Notching Factors [4] Adjustments Up: Financial Stability Adjustments Down: Economic or Revenue Concentration or Volatility
Rating: a) Scorecard-Indicated Outcome b) Actual Rating Assigned
Measure
111.2% $50.2
A 6.5% Aaa
A
21.8%
1 -1
[1]Economy measures are based on data from the most recent year available. [2] Fixed costs and debt and pensions measures are based on data from the most recent debt and pensions medians report published by Moody’s. [3] ANPL stands for adjusted net pension liability. [4] Notching factors 5-10 are specifically defined in the US States and Territories Rating Methodology. Sources: US Bureau of Economic Analysis, state audited financial statements, Moody’s Investors Service
Score
Aaa Aa A Aa Aaa A A
Aa3 Aa3
Endnotes
1 This calculation is based on the Permanent Fund's $76.3 billion value as of March 31, 2021 compared with $66.3 billion as of June 30, 2019.
2 Alaska is the only US state not to levy broad taxes on either retail sales or individual income. The state is one of five that do not impose a broad sales and use tax and one of nine with no tax on wages and salaries.
3 According to the Alaska Department of Health and Social Services, almost 35% of all Alaskans had been fully vaccinated as of May 3, exceeding the 31.8% national percentage reported by the Centers for Disease Control and Prevention.
4 This revenue represents the average of the revenue projections at $60 per barrel and $70 per barrel. The projection assumes that average daily production will decline by about 8%, to 439,600 barrels per day, during the coming year.
5 Prior to SB 26, the legislature only appropriated from the ERA to pay dividends to Alaska residents or to make “inflation-proofing” deposits to the fund's principal.
6 “FY 2022 Budget Overview and 10-Year Plan,” Office of Budget and Management, Office of Governor Mike Dunleavy; December 11, 2020
7 Eric Forrer v. State of Alaska; Supreme Court of the State of Alaska, No. S-17377; 4 September 2020.
8 The Constitution of the State of Alaska, Article XII, Sect. 7.
9 Unlike the population figure cited in the “Profile” section on page 2, these numbers are taken from the Census Bureau's annual estimates data rather than from the actual 2020 census.
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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.” Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER
1279449
9 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable
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10 4 May 2021
Alaska (State of): Update to credit analysis after outlook revision to stable