The credit rating agency Standard & Poor's said Friday it will likely drop Alaska's credit rating if Gov. Bill Walker's administration moves ahead with a plan to borrow money to reduce the shortfall in the state's pension funds.
"We think the transaction would tip us over into a downgrade," Gabe Petek, a San Francisco-based analyst for S&P, said in a phone interview Friday after the company announced its "CreditWatch."
S&P — one of the "Big Three" credit ratings agencies — had earlier given Alaska's bond rating a "negative outlook," meaning reductions were already possible.
A downgrade would drop Alaska's rating for general obligation bonds to a still-strong AA from AA+. The downgrade would be the second of the year after the state, facing a multibillion dollar budget deficit, lost its AAA rating, the highest available, in January.
Walker's administration says its new borrowing plan, using an instrument called pension obligation bonds, will save the state money. But S&P's CreditWatch reflects the fact the Walker's administration's plan assumes state investments will grow by 8 percent annually — an outcome that isn't assured.
[Walker administration resurrects plan to borrow for pension shortfall]
"We view it as having some risk," Petek said. "We're not assuming that there will be a large market correction. But we're also not ruling out the possibility for one — you can't ignore the fact that the market's been generally increasing in value for the better part of the last seven years."
S&P's action Friday won't stop the state from moving ahead with its borrowing plans, said Revenue Commissioner Randy Hoffbeck. But it will be considered when Walker decides on the final pension bond proposal, he added.
For the plan to be a boost to state finances, Alaska's investments only need to earn more than the cost of the interest on the pension bonds, which is expected to be less than 4 percent, Hoffbeck said.
"We don't see a lot of risk there," he said.
Two administration officials, Debt Manager Deven Mitchell and Deputy Revenue Commissioner Jerry Burnett, have pitched the bonds to investors in Asia recently and will do the same thing in Europe next week, Hoffbeck said.
Alaska's borrowing plan didn't affect the state's ratings from the two other big rating agencies, Fitch and Moody's, Hoffbeck added.