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Moody's Downgrades Alaska to Aa2; Outlook Remains Negative

Moody's Investors Service has downgraded the State of Alaska's general obligation rating to Aa2 from Aa1. The outlook remains negative.

The downgrade recognizes the state's political inability - at least for now - to address its severe fiscal challenges.

The Aa2 rating incorporates the state's extraordinary structural imbalance, under which it is running deficits of more than $3 billion per year, as well as its outsized pension liabilities and the economic difficulties caused by low oil prices. The rating also reflects the extremely large available reserves Alaska has, which buy it several more years to figure out what its fiscal future will look like. Our baseline assumption remains that the state will come to a political compromise to achieve a sustainable fiscal structure before coming close to depleting its reserves.

Moody's has also downgraded the state's lease-appropriation bonds to Aa3 from Aa2 and its moral obligation bonds to A1 from Aa3. These bonds continue to be rated one and two notches lower than the state's general obligation rating, respectively.

Rating Outlook

The negative outlook incorporates the uncertainty about Alaska's inability so far to achieve a more sustainable fiscal identity through political solutions. As the state spends down its reserves - which are still enormous - the risks to the state's long-term credit profile will intensify.

Factors that Could Lead to an Upgrade (Removal of Negative Outlook)

Achievement of a sustainable solution to the state's structural imbalanceEconomic recovery leading to more predictable fiscal operations

Factors that Could Lead to a Downgrade

Prolonged delays in achieving a budget solution, leading to significant further draws on available reservesContinued growth in long-term liabilities

Legal Security

The state's general obligation bonds are secured by its full faith and credit pledge.The state's lease-appropriation bonds and certificates of participation are secured by its commitment to pay debt service subject to appropriation by the legislature.The state's moral obligation bonds - primarily the Alaska Municipal Bond Bank - are secured by the state's commitment to consider replenishing any draws on a debt service reserve fund for the bonds.

Use of Proceeds

Not applicable.

Obligor Profile

Alaska is the largest state based on land mass, but its population ranks 48th among the states, at 738,000. Its GDP ranks 43rd.

Methodology

The principal methodology used in the general obligation rating was US States Rating Methodology published in April 2013. The principal methodology used in the lease-backed rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. The principal methodology used in the moral obligation rating was Moody's Approach To The Moral Obligation Pledge published in November 2008. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
 

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