Fitch Rates Alaska Municipal Bond Bank Authority's $39MM GOs 'AA+'; Outlook Stable
Fitch Ratings has assigned an 'AA+' rating to approximately $38.5
million of Alaska Municipal Bond Bank Authority (bond bank) general
obligation (GO) and refunding bonds, 2016 series one, issued under the
bond bank's 2005 GO bond resolution.
The bonds are expected to sell via competitive bid on Jan. 20, 2016.
The Rating Outlook is Stable.
The bonds are general obligations of the bond bank, for which the state
also maintains a standing appropriation of state general fund resources
to replenish the bonds' reserve fund in the event of borrower default.
This standing appropriation is the basis for the assigned rating on the
2005 resolution bonds.
KEY RATING DRIVERS
STATE ANNUAL APPROPRIATION: The state of Alaska includes as part of its
annual debt service appropriation in its operating budget an
appropriation for reserve fund replenishment in the event of a draw
related to default by a participating municipality (borrower), resulting
in a rating one notch below the state's 'AAA' GO rating.
PROVEN STATE SUPPORT AND STRONG REPAYMENT HISTORY: The bond bank's
programs have a solid history of debt repayment, and the state of Alaska
has a demonstrated history of support for and involvement with the bond
bank. The bond bank has consistently worked with the state to strengthen
bondholder protections while achieving its programmatic goals. The
state's own resources are substantial.
MULTIPLE LAYERS OF SECURITY: Multiple layers of security support bond
bank issues in the event of a local government's failure to pay debt
service on its obligations to the bond bank. Security enhancements
include underlying borrower reserve funds in some cases, bond bank
reserve funds, unrestricted assets of the bond bank held in the
custodian account, the state's standing appropriation for reserve fund
replenishment, the state's statutory moral obligation, and the bond
bank's statutory authority to intercept state aid to local governments.
Coverage of maximum annual debt service by state aid is substantial.
The rating is sensitive to movement in the state of Alaska's GO bond
rating to which it is linked.
The 'AA+' rating is based on the state's commitment to GO bonds of the
bond bank issued under the 2005 GO resolution in the form of a standing
appropriation of general funds for program reserve fund replenishment.
GO bonds issued under the 2005 resolution also incorporate multiple
layers of security on both the borrower level and state level. Issuance
requires either a borrower's GO or revenue pledge or other evidence of
pledged revenues for allowable debt obligations, with a borrower reserve
available for revenue bonds. Bond bank borrowers must demonstrate
project essentiality and ability to repay in order to access financing.
The current bonds will provide funding for four separate projects in the
Kenai Peninsula Borough, the city of Klawock, and Kodiak Island Borough;
and refund outstanding bonds issued by the bond bank under its 2005 bond
resolution on behalf of the cities of Klawock and Seward.
The bond bank maintains a pooled program reserve fund for the 2005
resolution bonds, funded at approximately $53.6 million as of June 30,
2015. The reserve balance is expected to increase to approximately $60.2
million following the current issuance, with funding comprised of cash
deposits from available funds ($37.1 million), cash from bond proceeds
($16.9 million), and surety policies ($6.7 million), including an
expected surety policy executed with this issue to meet the reserve fund
The program reserve fund is backed by a moral obligation of the state
established by state statute requiring establishment of a reserve and
requiring that the bond bank seek a general fund appropriation in the
event of a borrower's payment default. This pledge was strengthened with
the bond bank's commitment to seek a standing appropriation for these
bonds and the state's subsequent appropriation, beginning in fiscal 2009.
The bond bank was established in 1975 to provide access to low-cost
capital financing for Alaska local governments. Not inclusive of the
current sale, approximately $995.7 million in 2005 GO resolution bonds
are currently outstanding. The bond bank's limit for total bonds
outstanding at any one time is almost $1.8 billion; including the
current sale, total bonds and obligations outstanding is expected to be
just over $1 billion, inclusive of debt issued under the 1976 and 2010
BROADENING OF BOND BANK SCOPE
The bond bank was authorized in 2014 to lend up to $87.5 million to the
University of Alaska for heating and energy projects, secured by a
general revenue pledge from the university. The full authorization for
this purpose was issued in August 2015. Additionally, Senate bill 46 was
enacted in the 2015 legislative session that permits the issuance of
bonds or notes by the bond bank to state joint action agencies under the
2005 resolution. SB 46 also permitted the issuance of bonds or notes
secured by a revenue pledge of a regional health organization; however,
this issuance would occur under a separate indenture and is subject to
certain requirements. While Fitch believes these changes do not impact
the rating on the bond bank's obligations, Fitch notes the broadening of
the bond bank's role beyond its original scope.
STRONG SECURITY PROVISIONS
As noted above, the moral obligation for the bonds was strengthened by
inclusion in the state's annual budget, beginning in fiscal 2010, of an
appropriation to restore any deficiency in the 2005 program reserve
fund. An appropriation for this purpose was included in the enacted
budget for the fiscal year that began on July 1, 2015 and is included in
the governor's proposed budget for fiscal 2017. Further protections
include a state intercept of local aid for borrowers and the ability to
access the bond bank's unrestricted funds held in the custodian account.
The custodian account, bolstered by recent state deposits, prior reserve
releases, and funded at approximately $13.1 million as of November 30,
2015, is expected to be maintained at this approximate level in future
Payments by the borrowers are due seven days prior to debt service
payment; there have been no payment defaults under the program to date.
Program reserve funding is required at the IRS maximum and following the
current issue, the bond bank will have two surety policies meeting a
small portion of the funding requirement. The bond bank is considering a
gradual move to reserve funding that will be equally comprised of cash
and surety policies. Fitch will continue to review the use of surety
policies for the reserve requirement in regard to its relationship to
our criteria for these types of obligations while noting that the
cash-funded custodial account remains available to the bond bank to cure
State statute requires the bond bank chair to certify annually the sum
necessary to restore the program reserve to the required level. The
appropriation for program reserve replenishment is included in the
state's annual operating budget. A supplemental resolution for the 2005
resolution bonds requires the bond bank to seek the appropriation
ALASKA MAINTAINS SIZABLE RESERVES TO MITIGATE CHALLENGES
Alaska's 'AAA' GO rating reflects the state's maintenance of very
substantial reserve balances and conservative financial management
practices to offset significant revenue volatility linked to oil
production from the North Slope and global petroleum price trends. The
state prudently dedicated a substantial share of prior years' oil tax
revenue to reserves, growing reserves exponentially in advance of
expected lower oil production, and continues to employ long-range
forecasting of its revenue, expenses, and natural resources industry.
The state has a considerable reliance on oil tax revenue as a funding
source for its operating budgets and the sharp drop in crude oil prices
in late 2014 caused a revenue shortfall in fiscal 2015 totaling about
$3.8 billion (63% of unrestricted general fund expenditures) that was
covered by a draw from the state's vast financial reserves and the
application of the state's previous forward funding for education
expense in fiscal 2016. For the fiscal year that began on July 1, 2015,
the state's budget planned for a $2.7 billion draw on reserves to fund
operations; the expected draw has now increased to $3.6 billion due to
weaker than expected crude oil prices since the budget was enacted.
The governor has proposed an almost $6 billion undesignated General Fund
budget for fiscal 2017 that reduces operating expenditures from fiscal
2016 in addition to various proposed tax adjustments, including the
institution of a personal income tax, and modifications to the state's
oil and tax credit system to reduce expenditures. The budget proposal is
premised on a significant realignment in the flow of funds in the
state's fiscal structure that transfers price and production volatility
in the state's natural resources' industries to the state's Permanent
Fund, away from budgetary operations. The intent of the proposal is to
apply annual earnings on the Permanent Fund corpus to state operating
expenditures. Fitch expects the budget proposal to be discussed in the
upcoming 2016 legislative session.
For further information on the state, please see 'Fitch Rates Alaska's
$258MM Bonds and BANS; Affirms Outstanding GOs at 'AAA,' dated Feb. 27,
2015, which is available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Date of Relevant Rating Committee: August 19, 2015
Fitch recently published an exposure draft of state and local government
tax-supported criteria ("Exposure Draft: U.S. Tax-Supported Rating
Criteria," dated Sept. 10, 2015). The draft includes a number of
proposed revisions to existing criteria. If applied in the proposed
form, Fitch estimates the revised criteria would result in changes to
fewer than 10% of existing tax-supported ratings. Fitch expects that
final criteria will be approved and published by Jan. 20, 2016. Once
approved, the criteria will be applied immediately to any new issue and
surveillance rating review. Fitch anticipates the criteria to be applied
to all ratings that fall under the criteria within a 12-month period
from the final approval date.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
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