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We Build Alaska

Brad Keithley’s Chart of the Week: Is the Governor telling Wall Street something different than Alaskans?

In a recent press release, Governor Mike Dunleavy (R – Alaska) and Revenue Commissioner Adam Crum attempted to run a victory lap regarding Alaska’s current fiscal situation.

Hi-liting a recent bond rating from Kroll Bond Rating Agency (Kroll), Dunleavy said, “The rating … is a vote of confidence in the work we’ve done to manage the State’s finances. Disciplined financial policies and practices throughout my administration and the support of the legislature have reassured the credit rating agency of Alaska’s financial strength.”

While both Dunleavy and Crum characterized Kroll’s rating as an “upgrade,” it’s not. Kroll had not previously rated the state’s bonds. While the review, which Kroll says the state paid for, gives the state a slightly higher rating on Kroll’s scale than the other rating agencies who have reviewed Alaska over a much longer period – Moody’s Investment Service, Fitch Ratings, and S&P Global – do on theirs, it’s not an upgrade from a previous review. It’s simply Kroll’s initial review.

Moreover, it’s not even a significant change from the current ratings of two of the other three agencies.

According to Investopedia, here are the current rankings used by the various rating agencies:

In that context, here are the current ratings by those agencies of the state’s general obligation (GO) bonds:

While the ratings “notch” assigned by Kroll is slightly higher on its scale than that previously assigned by Moody’s and S&P on theirs, all three are in the “high quality” category. The Kroll rating just adds slightly more weight to Moody’s and S&P ratings in offsetting the slightly more dour view taken by Fitch.

But more significantly, Kroll’s rating is based on a version of Alaska fiscal policy that appears to differ appreciably from that previously articulated by Dunleavy both for home audiences and the rating agencies. Taken together with Dunleavy’s earlier comments in his FY 2024 veto message, it continues to raise the question of whether the administration is changing its position on fiscal issues.

Since first announcing his run for governor back in late 2017, Dunleavy has consistently placed a “full” Permanent Fund Dividend (PFD) or something approaching it at the center of his fiscal policy. Every budget his administration has submitted since his initial election in 2018 has proposed to distribute either a “full” PFD calculated in accordance with current law (AS 37.13.145(b)) or one based on a 50/50 split of the annual percent of market value (POMV) draw from the Permanent Fund earnings reserve (AS 37.13.130(b))

None have proposed the so-called “leftover” approach adopted by recent legislatures of calculating the PFD based on what’s “leftover” from the POMV draw after paying for the costs of government.

The resulting tension has consistently been hi-lited by the state’s existing rating agencies in their reviews.

Fitch, for example, included the following caution in its April 2022 rating revision:

Consensus has not been reached on the size of this year’s PFD payment to Alaskans (paid in October), which is drawn from investment revenues held in the PFER under the POMV formula. Dividend payments as a share of the PFER have been modified since 2015 as the state struggled to address weak revenues. …

Political disagreement continues settling the question of how to split the draw between the PFD and state operations while ensuring that inflation-proofing can still take place. Legislative proposals include instituting broad-based, temporary taxes to augment UGF resources until the PF is sufficiently large to allow a POMV draw [that] is large enough to support multiple demands, while multiple alternative proposals include narrowing the scope of state spending to ensure that a PFD set at 50% of the POMV can be met.

Unlike the other reviews, however, nowhere in Kroll’s detailed review is either the statutory or POMV 50/50 (or even the POMV 25/75) approach discussed.

Instead, Kroll describes the PFD as entirely discretionary, in the same way the Legislature has treated it since 2018: “Dividend payments reduce the level of resources available for operating purposes, but the Legislature’s discretion in setting the APF-ERA transfer, and the level of dividend payments each year, provides flexibility with respect to managing the State’s finances.”

In addition, while the Dunleavy administration previously has gone out of its way in its various budget documents to treat the portion of the annual POMV draw from the earnings reserve designated for the PFD as separate and apart from “expenditures,” Kroll’s review instead treats the amount set aside for distributions simply as another ‘expenditure” line item.

Especially as an initial bond rating, Kroll’s analysis will have been based on presentations and discussions with the Dunleavy administration. Rating agencies do not develop their own facts about the manner in which an entity is operating or an independent set of financial statements. They analyze the information provided by the entity and from other sources.

As a result, in the same way as with Dunleavy’s statements at the time he announced his FY 2024 vetoes, we are concerned that the administration’s decision to reach out to a brand-new rating agency reflects an ongoing shift in the Dunleavy administration’s position on the PFD.

It certainly is easier to shift to a new fiscal approach with a new rating agency than it is to explain a shift to an old one. Given their history, describing the administration’s position as reflected in the Kroll analysis to Moody’s, Fitch, or S&P would have raised questions and certainly resulted in an extended discussion of the shift in their subsequent review. Laying down a revised approach to an agency without that history avoids the resulting questions.

Further supporting our concern is the absence of any discussion in the Kroll report about substitute revenues. As noted above, such a discussion was prominent in Fitch’s April 2022 report. The same issues surfaced in the last S&P report, from March 2022. There, S&P noted:

The state has autonomy to raise taxes and other revenues via the Alaska constitution; in addition, there is no constitutional constraint or extraordinary legislative threshold for approval (a simple majority requirement for approval of new taxes). … [But] complicating potential revenue reform, in our view, are political considerations that prevent the state from taking action despite having the legal flexibility to do so. Such limitations have prevented Alaska from enacting revenue reforms in past years. … While there have been discussions of diversifying state revenue sources, we believe imposing significant taxation on a new type of economic activity would be politically difficult.

Aside from generally noting that “[a] meaningful diversification of revenue sources” could lead to an improvement in the state’s ratings and that the state has “has legislative control over its revenues, with independent legal ability to adjust operating revenues as needed,” the Kroll report contains no similar discussion about the potential adoption of substitute revenue sources.

The Kroll report certainly contains no reference to Dunleavy’s commitment during the last session to submit a sales tax bill or his statement that, unlike as occurs with PFD cuts, “a broad-based [revenue] solution that doesn’t gouge or take huge parts from one sector (of Alaska) or another, or penalize one sector for another is probably the most important thing we can do.”

The Kroll report acts as if those statements – clearly relevant to any discussion of the state’s financial condition – were never made.

Based on the press release and given the time, expense, and effort involved in obtaining it, we anticipate that the Dunleavy administration intends to attempt to make much of the Kroll report in the coming months. Indeed, we would not be surprised to hear Dunleavy, Crum, and others argue that since the fiscal policy outlined in the report has earned the state a (slightly) higher bond rating on the Kroll scale than it currently holds from the other rating agencies, the state shouldn’t rock the boat by pursuing other approaches.

Of course, that would be hugely disappointing because the effect would be to cement in place what Dr. Matthew Berman of the University of Alaska – Anchorage’s Institute of Social and Economic Research (ISER) has called “the most regressive tax ever proposed,” and which, according to ISER’s 2016 study for the then-administration of Governor Bill Walker, has the “largest adverse impact” on the overall economy of all of the funding options.

But as we explained in the earlier column we wrote at the time of the Governor’s FY 2024 veto message, it would be consistent with the position that the upper income-oriented Alaska Policy Forum, Americans for Prosperity – Alaska, and others in the top 20% income bracket repeatedly have urged Dunleavy to take.

To them, the important issue is continuing to expand the “tax avoidance credit” to keep pace with state spending levels, regardless of how big the adverse impact is on the remaining 80% of Alaska families and the overall Alaska economy.

The doublespeak Dunleavy and Crum appear to be engaged in between the rating agencies and Alaskans is consistent with that approach.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.

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6 months ago

Kroll? Really? Kroll? Who would care what Kroll thinks?