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<i>The Week in Public Finance</i>: Alaska Avoids Its Problems, More Health-Care Pain and Municipal Defaults Are Up

A roundup of money (and other) news governments can use.

The Alaska State Capitol in Juneau
The Alaska State Capitol, right, sits near the water in Juneau.
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Alaska Avoids Fixing Its Budget Problem (Again)

Facing a $2.5 billion budget gap, Alaska lawmakers have sent Gov. Bill Walker a budget that once again relies on one-time fixes and a massive withdrawal from the state’s rainy day fund.

Walker had proposed a compromise fiscal package that included a combination of revenue-raising measures and spending cuts, reforms to the state’s oil and gas tax credit program, modifications to the income tax, and reductions to residents’ annual dividend payments from the state's Permanent Fund. Instead, the $4.1 billion general fund spending plan passed by lawmakers caps Permanent Fund payments to $1,100 and relies on a $2.4 billion withdrawal from the state’s once-robust rainy day fund.

Walker has repeatedly warned lawmakers that they can't keep relying on the state’s reserves to fund its annual spending plans. But lawmakers have consistently done so anyway, making multibillion-dollar withdrawals for the past three budgets. At its peak, Alaska had $13 billion in savings. Now, with roughly $2 billion left going into fiscal 2018, another savings withdrawal could bankrupt the fund and still not cover the projected budget gap.

The Takeaway: The budget places Walker in a tough political spot. Signing it all but guarantees another credit rating downgrade on his watch. Last week, S&P Global Ratings warned it would likely lower the state’s rating if its next budget relied on a “significant amount of its reserves.”

It also means that the state legislature will be arguing over the very same problems when it reconvenes in 2018 -- this time while Walker is presumably running for re-election. If his proposals for a new income tax and other structural changes to the budget were hard before, pushing them through in an election year will be even more difficult.


New Health-Care Proposal, Same Bad News for States

The proposed Senate health-care bill, the Better Care and Reconciliation Act, would have negative credit implications for states and public nonprofit hospital if it passed, according to Fitch Ratings. "The legislation would likely substantially reduce federal funding to states, and put fiscal pressure on local governments, public colleges and universities, and health-care providers that rely on state support,” says Fitch’s Eric Kim.

While the $772 billion reduction in federal Medicaid aid to states over the next decade is less than that projected under the House version, Kim says that the Senate version will still likely result in higher long-term costs for states.

Medicaid spending accounts for $1 out of every $5 state governments spend. The federal government currently matches what states spend each year, but the proposed health-care bill would eventually cut federal funding by more than 20 percent.

The Takeaway: The Congressional Budget Office's score on the Senate bill this week has stalled a vote on it as many members were taken aback by the unseemly numbers -- which included an estimate that 22 million people will loase their health insurace by 2026. The delay is good for states that are wringing their hands at the possibility of dealing with potentially massive Medicaid cuts. But it also prolonges the annoying uncertainty regarding the federal government’s future role in health-care policy.


More Defaults

Puerto Rico’s fiscal crisis will continue to be a drain on the municipal market, warns Moody’s Investors Service. The commonwealth was responsible for all four of the municipal defaults rated by the agency in 2016, and Moody’s says that number could more than double in 2017.

Puerto Rico defaulted on $22.6 billion in debt last year, by far the highest annual total in the 47-year period covered in Moody’s annual default study. The commonwealth has more than $74 billion in outstanding debt, not including pensions.

The study says that U.S. governments remain “broadly stable and highly rated” and notes that defaults and bankruptcies are still very rare, occurring less than one-tenth of a percent of the time in the last four decades. However, the report also notes the sector “is fundamentally evolving” and that the last decade has seen more credit distress as defaults have extended to general governments (as opposed to special districts or agencies).

The Takeaway: Credit rating agencies primarily look at a government’s ability to pay back its debt, and on that record municipal governments have been excellent. But long-term fiscal pressures worsened by the Great Recession have now created “a new normal of uneven economic recovery,” says Alfred Medioli, a senior vice president at Moody’s.

Notably, the municipal default rate over the entire study period was 1.4 defaults per 2,000 issuances. Looking at just the years since the recession, the rate has jumped to three out of every 2,000 municipal bond issuances. As such, Medioli says, a small, but growing minority of municipal issuers will be in a weakened position when the next recession arrives.

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Liz Farmer is a former GOVERNING fiscal policy writer.
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