Blog

Why should we care about Alaska’s credit rating downgrade?

Posted in

jonathan_king-200x288Recently, Moody’s Investor Services downgraded Alaska’s credit rating for the second time this year citing Alaska’s failure to make progress on developing a sustainable fiscal structure and the state’s “extraordinary structural imbalance”. In short, the credit rating agencies are concerned that Alaska’s going to run out of money before we overcome our current political deadlock. However, why should Jane or Joe on the street care what these agencies think?

Well, these companies are to corporations and governments what the consumer credit rating agencies are to you and me—they’re the people who decide whether or not we are credit worthy and how likely it is that we won’t repay a loan. Whenever you apply for a credit card or a loan of any type the people who are going to loan you that money run a credit check, which is expressed as a score between 300 and 850. The higher your number, the more likely the lender is to give you the loan and the less expensive that loan will be through the form of a lower interest rate. If you have a low enough number, you don’t get the loan or it costs you much more than a person with a higher score. What Moody’s is saying to the world is that we Alaskans, as a whole, are more of a risk than we were before the downgrade and lenders should charge the state more to finance projects.

We Alaskans don’t pay any broad-based tax to the state, so why should we care about these projects costing just a little bit more? Well, for a few reasons: 1) the state is running out of money, so any additional expense exacerbates our fiscal crunch; 2) eventually we Alaskans will need to pay a broad-based tax to the state and we’ll be stuck paying more with a lower credit rating; 3) if the state pays higher interest on its debt, then any given project budget will have less money to spend in-state and that means fewer jobs and lower quality roads. While these rating agencies seem far away from the person on the street eventually these credit downgrades will affect our quality of life and the health of the economy.

Jonathan King
Promoter of Continuous Improvement
Northern Economics, Inc.

Share This