Fitch downgrades Anchorage bond rating, though it calls city’s fiscal outlook ‘stable’

A major credit rating agency has lowered Anchorage’s grade for bonded debt, citing the city’s diminished financial stature after spending heavily to cope with multiple emergencies in the last few years.

Fitch Ratings, one of the three major credit rating agencies, downgraded $105 million of Anchorage’s general obligation bonds from AA+ to AA, though it deemed the city’s fiscal outlook “stable.”

The change means the city will pay a slightly higher rate for debt it takes on for large-scale spending projects like infrastructure improvements. For local property owners, those increases are likely to be overshadowed by larger economic forces like inflation and the Federal Reserve’s recent increases to interest rates.

Though the agency’s report paints a picture of a municipality with strong fiscal fundamentals, its downgrade comes as a result of the city depleting a large share of its financial reserves by aggressively spending cash and federal aid to deal with the 2018 earthquake and the pandemic, even as reimbursements from the Federal Emergency Management Agency have been slow to be paid back.

“The municipality expects most of these costs will be reimbursed by FEMA or recouped through tax changes, but the timing is uncertain, which could leave the municipality with a reduced financial cushion for an indeterminate period of time,” the agency wrote in an announcement on the downgrade. “Unlike other municipalities, Anchorage expended its full American Rescue Plan Act (ARPA) funds instead of waiting until some costs had been reimbursed, leading to the materially low reserve levels.”

An estimated $145 million in outstanding expenses is eligible for repayment by the state and federal government, according to Fitch. It expects that reimbursements, along with a return to pre-pandemic levels in revenue streams like hotel bed taxes, will nudge the city’s rating back upward in the next two to three years.

“The downgrade is not surprising,” said Assembly member Austin Quinn-Davidson, who chairs the budget and finance committee. “We’re still recovering from the pandemic and expecting additional reimbursement from FEMA. That takes time, and is not unique to Anchorage, which the Fitch representatives acknowledged in our meeting.”

The agency said, “once reserve levels are restored to the municipality’s fund balance policies, Fitch believes Anchorage will return to having a very-strong level of gap closing capacity in relation to assumed revenue volatility and high inherent budget flexibility.”

“Budget management is considered strong given the municipality’s track record of aligning expenditures with revenues and history of maintaining healthy reserves,” it said.

[Anchorage Assembly approves $587 million city budget]

This is the second recent downgrade for the municipality; last year S&P Global Ratings moved Anchorage from AAA status to AA+.

Asked for a response from the mayor’s administration on the downgrade and its assessment of the city’s short-term financial outlook, a spokesman emailed a short statement from the mayor blaming the Anchorage Assembly and pointing to budget cuts as a remedy.

“As the legislative branch, the Assembly appropriates, they hold the purse strings. Spending decisions by the Assembly have had a direct impact on our bond rating,” Mayor Dave Bronson wrote.

“Fitch’s downgrading is in direct relation to the actions of the Anchorage Assembly. Depleting General Fund Reserves and spending ARPA funds, instead of saving portions until there was a better understanding of FEMA Reimbursement were decisions made by the Assembly that directly contributed to the downgrade. Many other local governments prudently saved portions of ARPA funds while they waited for FEMA reimbursement,” Bronson spokesman Corey Allen Young said. “The Mayor believes that the time to act is now, we must be fiscally prudent. He will continue to seek a decrease in government spending, to reduce the burden on tax payers and leave our children and grandchildren with a city that is fiscally strong.”

During the most recent round of ARPA relief, Bronson’s administration’s proposal was spending the entirety of funds, with no plans presented for saving money. This year, the proposed budget introduced by Bronson was around $17 million more than what passed the year prior, before it underwent revisions by the Assembly.

“To somehow criticize previous administrations or the Assembly for doing what you proposed we do is pretty hypocritical in my mind,” said Jason Bockenstedt, who served as a chief of staff in the last administration and is now contracted to assist Assembly members with the budgeting process. “It’s an interesting look at a different reality than what took place.”

Bockenstedt listened to the administration’s presentation this year to the credit rating agencies and, having been a part of the same kinds of meetings in his previous role, he said he thought executive officers did a poor job of conveying the full picture of the city’s progress on diversifying revenues and bolstering its financial position.

“There was no participation by the administration,” Bockenstedt recalled. “You have to actually show up if you’re doing the job.”

He pointed out that every mayoral administration is presented with new economic challenges. During his time working in the Berkowitz administration, those included not only the 2018 earthquake and COVID-19, but unexpected cost overruns from the SAP software project, recouping money from the failed Port of Alaska expansion, and dwindling state contributions for school bond debt reimbursement and community revenue sharing amid cratering oil prices. To compensate, the administration pursued an alcohol tax to bring in new revenues, brokered the sale of the Municipal Light & Power utility, placing revenues from the sale in a trust.

“In none of those years did we see our bond rating decrease, and I think part of that was we rolled up our sleeves and did the work to fix some of the problems,” Bockenstedt said. “Unfortunately I just don’t see that being done by this administration.”

Fitch noted that Anchorage’s finances are relatively stable, and barring major changes in population or property value, unlikely to fluctuate much in the near term.

“Property taxes account for nearly two-thirds of the municipality’s general fund revenues, limiting the municipality’s exposure to more economically sensitive revenues,” the agency wrote.

Fitch also noted the municipality has seen good results from new revenue sources like taxing cannabis and a better-than-expected income from the hotel bed tax in the last year, and noted the city has “no cash flow issues and has $640 million of borrowable cash available for short-term use.”

“The Assembly continues to work to make Anchorage a thriving city, and over the last couple of years has strengthened the City’s finances,” Quinn-Davidson said. “We now expect an approximately $10 million additional annual return from our trust due to the sale of ML&P, and we have new non-property tax revenue, both of which allow us to provide additional services to residents without burdening homeowners.”