OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to $58.045 million Matanuska-Susitna Borough, state of Alaska lease revenue refunding bonds, series 2016 (Goose Creek Correctional Center Project).

The bonds are scheduled to sell via negotiation on or about July 7, 2016.

The Rating Outlook is Negative.

SECURITY

The bonds are special obligations of the state of Alaska secured by annual lease payments from the state department of administration (DOA) on behalf of the state department of corrections to the Matanuska-Susitna Borough (the borough). Source of lease payments is annual appropriations from the state's unrestricted general fund (UGF).

KEY RATING DRIVERS

State Appropriation

The rating on the bonds, secured by annual legislative appropriations from the state's UGF pursuant to a lease purchase agreement, is one notch below the state's 'AA+' Issuer Default Rating (IDR). The rating reflects the state's general credit standing, sound lease structure, and statutory authorization for these types of bonds.

Economic Resource Base

Alaska's economy is largely based on the development and application of its abundant natural resources, the production of crude oil and natural gas deposits, prominent fishing industry, and mining and tourism. An estimated one-third of the state's gross state product is attributed to the drilling, production, and economic multiplier effects of the turbulent oil and natural gas sectors; a primary source of vulnerability for the state. Rapid deterioration in crude oil prices over the past 18 months has led to rig closures and reduced employment. The state's recent unemployment rate was equal to 132% of the nation's and has climbed on an annual basis since 2013, prior to the severe, global decline in oil prices. The Federal government is a large employer and a key driver of the state's economy (an estimated 36% of the state's economy is derived from Federal employment.).

Revenue Framework: 'a' factor assessment

Fitch expects the state to continue to derive an outsized proportion of its operating revenues from taxation, leasehold interest, and royalty payments related to petroleum development. These narrow revenue sources will continue to reflect the economic volatility tied to the extensive natural resources sector, impeding the development of a more predictable financial performance. The state has complete control over its revenues, with an unlimited independent legal ability to raise operating revenues as needed.

Expenditure Framework: 'a' factor assessment

The state maintains solid expenditure flexibility with a manageable burden of carrying costs for liabilities and the broad expense-cutting ability common to most U. S. states. As with most states, Medicaid remains a key expense driver and Fitch believes the state will be challenged in meeting increased expenditures due to insufficient expected revenue growth.

Long-Term Liability Burden: 'aa' factor assessment

Debt levels are low for a U. S. state but on a combined basis, the state's net tax-supported debt and unfunded pension obligations are well above the median for U. S. states as a percentage of personal income. Other post-employment benefit (OPEB) obligations are sizable but well-funded. Both pension and OPEB liabilities are constitutionally protected benefits.

Operating Performance: 'aa' factor assessment

The state's strong management of its financial operations and extraordinarily sizable reserve balances has historically offset volatility in its revenue sources; however, the state will be ending fiscal 2016 with its fourth consecutive operating deficit and a sizable deficit is expected in fiscal 2017. Available reserves are forecast to remain strong at the end of fiscal 2017 under various scenarios although eventual depletion is expected absent revenue reform, sharp expenditure reductions, or a return to more robust oil prices; a scenario that Fitch's views as unlikely through the medium term. While the state's permanent fund is robustly funded, the principal may only be accessed through an amendment to the state constitution, which is a limiting factor.

RATING SENSITIVITIES

LINKAGE TO STATE OF ALASKA: The rating on the lease revenue bonds is sensitive to movement in the state's IDR to which it is linked.

ACHIEVEMENT OF MEANINGFUL FISCAL REFORM: Failure to enact measures to improve fiscal balance will put negative pressure on the state's IDR and linked ratings.

CREDIT PROFILE

The bonds currently offered are secured by lease payments from the state of Alaska, subject to annual legislative appropriation. The rating reflects the strong lease structure and the state's general credit features, including moderate debt, conservative financial planning, and substantial reserves. Proceeds of the bonds will partially refund the borough's series 2008 lease purchase bonds originally issued to fund construction of a state correctional facility on land owned by the borough. Lease payments by the state are made directly to the trustee, and the state assumes ownership upon full amortization. Bonds are specifically authorized by the state legislature, and the DOA pledges to include lease payments in the budget.

For additional information on the state of Alaska, please see Fitch's press release dated June 14, 2016, 'Fitch Downgrades Alaska's IDR to 'AA+'; Outlook Negative'.