Fitch Ratings has assigned an 'AA' rating to the following North Slope
Borough, Alaska (the borough) bonds:
--$82.4 million general obligation (GO) general purpose bonds series
--$13.3 million general obligation (GO) school bonds series 2015B.
The bonds are scheduled to sell via negotiation the week of Oct. 19,
2015. Proceeds will be used to fund the borough's ongoing capital
improvement program and to pay cost of issuance.
In addition, Fitch affirms the following ratings:
--$300.5 million outstanding GO bonds at 'AA'.
The Rating Outlook is Stable.
The bonds are payable from an unlimited ad valorem property tax levy on
all property within the borough.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: The borough's financial position is sound
with solid general fund reserve and an extraordinarily large permanent
SOLID BUDGET FLEXIBILITY: The borough's budget is structurally balanced,
and the elected Assembly has ample tools to respond to potential
financial risks, including the ability to raise its operating property
tax levy and permanent fund transfers significantly. The expenditure
framework is also reasonably flexible.
MAJOR ENERGY PRODUCER: North Slope Borough is home to the U.S.'s largest
conventional oil field at Prudhoe Bay as well as smaller but significant
oil and natural gas resources. The borough's oil and gas reserves are
non-renewable and naturally declining resources, but new investments and
improved technology has repeatedly pushed out the estimated lifespan of
local oil fields.
OIL DOMINATED TAX BASE: The $21 billion tax assessed value (AV) is
dominated by oil extraction enterprises and highly concentrated in the
top 10 taxpayers. AV is insulated from short-term fluctuations in oil
prices, but it is vulnerable to erosion during periods of sustained low
MODERATE DEBT, RAPID AMORTIZATION: The borough's debt burden is moderate
and declining as a percent of AV. Debt amortizes very rapidly, well
within the lifespan of the borough's existing oil fields.
The rating is sensitive to changes in the borough's financial, economic
and debt profiles. The rating is unlikely to move higher due to economic
concentration. The rating could come under downward pressure if low oil
prices led to a sustained and significant decline in assessed values.
The borough is located on the north coast of Alaska, encompassing a vast
94,877 square miles, an area slightly larger than the United Kingdom.
The borough's modest population of 9,703 swells to 18,840 after
including oil and gas industry workers.
ENERGY EXTRACTION DEPENDENT
The borough has a large, energy-dominated economy. The borough produced
about 500,000 barrels of oil per day in 2014. Production has fallen from
a peak of 2 million barrels per day in the 1980s but still makes up more
than 5% of U.S. production. Estimates of total recoverable reserves have
increased over the years with improvements in technology and the
exploration of areas farther from the first fields developed at Prudhoe
Bay in the 1960s and 1970s.
Continued exploration of oil fields across the borough, the
participation of more second tier oil and gas companies, and the
prospect of huge gas reserves in the North Slope suggest that activity
will continue at a significant level for the foreseeable future. The
borough's harsh Arctic environment is likely to support only a very
limited economy in the era after energy production, but the borough is
actively building its permanent fund to prepare for that time, which is
likely to come well after all currently outstanding debt matures in 10
CONCENTRATED TAX BASE
The tax base is highly concentrated with 90.8% of AV related to the top
10 tax payers, all energy companies. The top two taxpayers, BP PLC
(Issuer Default Rating 'A' with a Positive Outlook) and ConocoPhillips
(Issuer Default Rating 'A' with a Negative Outlook), account for 65% of
AV is driven by the oil industry capital investments in the borough and
much less volatile than energy prices. AV is based on the depreciated
replacement cost value of the capital stock, not the economic value of
oil infrastructure or mineral resources in the ground. AV fluctuates as
investment rises and falls, but changes are driven by gradual
depreciation and the degree to which depreciation is offset by new
investment. Investment decisions are driven by long-term energy price
expectations and only appear in AV data with a significant lag. AV
increased 8.9% in 2015.
While economic concentration limits the rating, the continued growth of
the tax base, driven by both reinvestment in existing assets and new
fields, suggests that the borough's natural resources will support a
significant level of economic activity for much longer than the rated
bonds are outstanding. The North Slope produces a significant portion of
the revenues and economic output of the state of Alaska (GOs rated 'AAA'
with a Stable Outlook).
VERY STRONG FINANCIAL POSITION
Solid revenue growth and prudent management practices have allowed the
borough to build very large operating reserves. Unrestricted general
fund balance (the sum of committed, assigned and unassigned balances
under GASB 54) was $153.5 million or 33% of general fund expenditures
and transfers out in fiscal 2014. The current rating is dependent on the
maintenance of significantly above-average fund balances, as high
reserves provide an offset to concerns about the concentrated tax base
and time to respond to unexpected changes in tax revenues.
The borough's operating budgets appear structurally balanced, and
borough policy makers have ample expenditure and revenue flexibility to
respond to typical, cyclical financial pressures. A recently relaxed
property tax cap (Senate Bill 138) significantly boosted the borough's
revenue raising flexibility and budgeted fiscal 2016 revenues. The law
allows the borough to use more of its tax levy for operations and less
for debt service, which is declining. The borough's budgeted fiscal 2016
operating revenues are projected to rise $74 million, or about 40%, from
2015. The increase reflects a large increase in the operating levy that
was fully offset by a reduction in the debt service levy, keeping the
overall tax rate unchanged. The increase in revenues allowed the borough
to cease annual withdraws from its permanent fund.
The borough's labor environment and an unusually high level of public
services provided by the borough suggest that significant expenditure
flexibility exists if the borough needed to reduce expenses; however,
such reductions might prove politically difficult, given the high level
of demand for services from the public.
The borough's financial position is further strengthened by a large and
growing permanent fund with assets of $572.9 million as of June 30,
2014. The borough may withdraw as much as 8% of the fund annually for
general governmental use. However, given the additional operational
funding available under SB 138, the borough has ceased withdrawals and
begun making annual contributions to the permanent fund. The borough has
prudently decided that 25% of growth in unrestricted general fund
balance will be deposited in the permanent fund, as well as the money
earned by the borough's real property management fund.
MODERATE DEBT BURDEN
The overall debt burden will be moderate at 2% of AV after the current
issue. Debt is extraordinarily high on a per capita basis at $40,832 due
to the sparsely populated nature of the borough. Debt amortizes very
rapidly with 100% paid in 10 years.
Pension and other post-employment benefit (OPEB) liabilities are less of
a concern for the borough than many municipalities because the state of
Alaska has largely assumed responsibility for underfunded public
retirement plans. The borough pays a fixed percentage of payroll to the
state for pension and OPEB, but these payments are a small part of its
budget (0.8% of governmental funds spending in 2014).
The total carrying cost of pension, OPEB and debt service is high at 35%
of spending due to the borough's practice of paying its bonds down very
rapidly. The elevated carrying cost is not a credit concern because it
does not reflect an excessive debt burden, given moderate debt ratios
and rapid amortization.
LARGE CONTINGENT LIABILITY
The borough reports a large contingent liability related to ongoing
litigation over the taxable valuation of the Trans Alaska Pipeline
System (TAPS), which is routinely appealed by taxpayers. While recent
court rulings have gone in the borough's favor, the borough estimates
its current exposure at about $80 million to $100 million if it lost the
outstanding cases in their entirety. A second dispute with the state of
Alaska centers on whether excess tax revenues collected after
revaluations belong to the borough or the state. The outcome of such
disputes is hard to predict, but upcoming rulings could put downward
pressure on the rating if the borough were forced to repay the entire
contingent liability in one payment. Fitch will continue to monitor
judicial rulings on TAPS and the borough's reaction to such rulings, but
the borough appears to have the resources and flexibility to respond to
even the worst case scenario. In addition to its general fund resources,
the borough would have the option of increasing permanent fund
withdrawals for a period of time.
Additional information is available at 'www.fitchratings.com'.
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.
In addition to the sources of information identified in the applicable
criteria specified below, this action was informed by information from
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form
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