By Rob Yundt & Jodi Taylor
Recently, regional banks in the U.S. and one major international bank have either collapsed, are in crisis, or have been rescued by larger banks due to liquidity issues. Given these financial headwinds, this is a great time to assess the financial viability of the Municipality of Anchorage as voters decide how to vote on the many bonding propositions on the ballot.
In November 2022, Anchorage had its bond rating (credit score) downgraded by Fitch, citing the Muni’s depleted cash reserve levels which were not adequate to cover 10% of the Muni’s current year expenditures in its general fund. That means the Muni was required to have about one month’s annual expenses in cash in order to maintain its rating – it did not.
Later, Fitch updated its rating notes after finding the Muni could borrow up to $640 million in cash. Basically, it found that the Muni’s liquidity issues were solved because the it had a “credit card” with a $640 million limit. That’s not the kind of financial strength one would hope for, and not how we the voters run our personal finances.
In fact, financial advisors suggest families have 3-6 months of cash on hand. The Muni has less than a month.
Contrast that with the Mat-Su Borough. In 2022, Fitch maintained the borough’s bond rating, although the borough was not seeking to borrow any money. Fitch cited the strong cash reserve position for the rating. The Mat-Su has roughly two month’s annual operating expenses and one year of its annual debt service on hand.
Anchorage and the Mat-Su also differ regarding what type of capital projects they take on, and how they pay for them. For example, Anchorage is asking voters to approve a bond to repair roofs, replace worn out equipment, or rehabilitate a trail – essentially bonding for maintenance, which is a dubious financial position to be in.
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Contrast this with the Mat-Su Borough paying $25 million for a new school this year … with cash.
Two years ago, Mat-Su voters approved a roads package – adding roads, not repairing them. Again, the borough paid cash. Mat-Su has increased its school enrollment by 64% in the last 10 years while paying for schools with cash – not bonding.
In addition, the cost of borrowing has increased. The average loan in 2020 was 3.7%, versus the current 7%. The feds just bumped rates a quarter point this week. Any new bonds (debt) added to the Muni would cost about 1.5 times what that same liability would have cost per month in 2020. Similarly, short term lending to cover monthly expenses, or the $640 million in borrowable cash, also will increase the Muni’s monthly expenses.
Given the problem the Muni has with low cash reserves, and the substantially increased costs of bonding, this is not the time to add more debt. Let’s learn lessons from the banking failures and the Mat-Su’s example of being financially prudent when taking on additional debt.
This is not the right time to add more debt to the Muni monthly expenses. It should wait until the Muni replenishes its cash reserves before taking on anything in the short term.
The views expressed here are those of the authors.
Jodi Taylor is the Board Chair for Alaska Policy Forum. Rob Yundt serves on the Mat-Su Borough Assembly.
