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State's credit outlook downgraded

Posted: Wednesday, August 28, 2002

ANCHORAGE (AP) -- A major New York bond rating firm said Tuesday that Alaska should reduce the gaping chasm between its income and expenses or expect to pay higher interest rates when it borrows money.

Moody's Investors Service, one of the two major bond-rating agencies, downgraded the state's credit outlook from stable to negative. The move did not affect the state's current bond rating, which remained at a strong Aa2.

Gov. Tony Knowles said the report was a call to action. Legislative leaders shrugged their shoulders.

The Moody's announcement on Alaska was part of the company's annual state-by-state credit accounting.

The financial outlook for all 50 states is negative because of the fragile national economy, the report concluded, but some states are doing better than others.

Florida, Hawaii and Nevada were upgraded from negative to stable. Alaska and half a dozen others slipped this year, boosting the number of states with a negative outlook to 15.

Ray Murphy, one of the financial analysts who wrote the Alaska report, said the state is financially healthy on most fronts. Its economy has grown 14 years in a row, it has record low unemployment, and last year Alaska enjoyed the nation's fourth-fastest growth in personal income.

Home ownership is up, bankruptcies are down and the state's savings accounts are sound. Alaska has little debt, and is the only state to have reduced its budget in the last five years.

The problem? Alaska's dependence on oil and state savings accounts, Murphy said.

Oil taxes and royalty payments no longer pay for state government operations, forcing the Legislature to tap the state's Constitutional Budget Reserve. Last year, the state drew about $800 million from that savings acount, and it could be exhausted in two years.

''Our changed outlook is a signal to the market that there is significant stress in Alaska,'' he said. ''The current revenue structure is insufficient to fund the operations of state government.

''A significant solution has to be developed to address this problem, and we don't know what that solution will be,'' Murphy said.

Knowles has been calling on the Legislature for several years to find a solution. ''The biggest threat to our economy and jobs is the inability to make progress on a long-term budget plan,'' he said Tuesday.

Knowles called the Moody's report ''a clear indication of how the financial markets will view our lack of resolve,'' and encouraged the Legislature and next administration to act quickly.

Larry Persily, deputy commissioner of the Department of Revenue, said the Moody's report came as no surprise, and he doesn't expect it to have any significant immediate impact on the state's finances.

But the next time Alaska sells a bond, Persily said, the rate will be affected by a host of factors, from the price of oil to the Dow Jones Industrial Average.

Outgoing Senate President Rick Halford, R-Chugiak, said Tuesday's report was the mildest possible rebuke. Last week the other major New York agency, Standard & Poors, published its annual rating and found Alaska's credit outlook stable.

''It probably won't have any impact,'' Halford said of the Moody's report, other than to give the Knowles administration ''one more opportunity they couldn't pass up to advocate for a state income tax and spending Permanent Fund income.''

Though he won't return to Juneau in January, Halford said he expects the Legislature will ignore the Moody's report, although not the underlying issues.

''We haven't bought the governor's proposed solution (to eliminating the fiscal gap), but that doesn't mean we shouldn't be looking at revenues and expenditures,'' he said.

Dave Rose, who used to be director of the Alaska Permanent Fund Corp. and now is a private financial adviser in Anchorage, said he thinks a downgraded credit rating is next.

''It'll cost us a little more'' the next time the state sells general obligation bonds, he said.

That could be soon. Voters in November will be asked to decide the fate of two bond packages totaling $360 million. One would fund schools, the other transportation projects.



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