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Analysis: Tax change could hurt rating Legislative Research Services says oil tax rollback could be viewed negatively; administration says no detrimental impact expected Becky Bohrer Associated Press
A legislative analysis released Sept. 28 suggests Alaska’s credit rating could take a hit if Gov. Sean Parnell’s oil tax reduction plan is adopted.
Parnell’s revenue commissioner, Bryan Butcher, downplayed the Legislative Research Services analysis, saying the administration talks with the rating agencies yearly and is “very comfortable” that if the oil tax reduction were to pass it would not have a detrimental impact on the state.
The report from legislative analyst Chuck Burnham, requested by Sen. Bill Wielechowski, D-Anchorage, states that a tax rollback could be viewed negatively if it means increased reliance by the state on cash reserves. Burnham notes that revenues are one factor among many considered by rating agencies.
Budget surpluses considered But it is a significant one, Wielechowski said. According to the analysis, when Standard & Poor’s upgraded its rating on a state bond package several years ago to AA+, it said the move reflected the state’s “very substantial budget surpluses in 2008 and 2009 and the successful implementation of a new, more progressive tax on oil production.”
Last year, Moody’s upgraded a bond package to Aaa, its highest rating, the analysis said.
It quoted the state’s debt manager, Deven Mitchell, as saying ratings analysts have expressed “some general concerns” about the potential for a tax change and diminished revenues to the state. If the state were to rely on reserves to balance the budget it would “put downward pressure on our rating.” He said Moody’s would likely be most sensitive to this, given its recent, high rating.
Parnell is seeking changes to the tax regime, which was passed in 2007, as a way to boost production and investment. Democrats, including Wielechowski, have criticized Parnell’s plan, saying it would lead to less revenue with uncertainties about how much or whether new investment would offset those losses. Parnell has cast the plan as an investment in Alaska’s future.
Reliance on oil a factor Butcher said the decline in the oil production curve has been discussed with the rating agencies. He said one of the reasons it’s been so difficult for Alaska to get the highest bond ratings possible — even with the state’s flush reserves — is the lack of economic diversity and heavy reliance on oil.
A downgrade could be costly, Wielechowski said: If the state were downgraded one notch and bonded for $5 billion to build the Susitna dam, it would incur $315 million more in interest costs, he said.
Butcher said the administration has kept the rating agencies abreast of its plans. And Parnell “is not going to do something that, in the long term, won’t be in the best interest of the state,” Butcher said.
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