OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to \$163.345 million Matanuska-Susitna Borough, Alaska's State of Alaska lease revenue refunding bonds, series 2015 (Goose Creek Correctional Center Project).

The bonds are expected to sell via negotiation on or about April 2, 2015.

The Rating Outlook is Stable.

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 (DOC) 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 'AAA' general obligation bond (GO) rating. The rating reflects the state's general credit standing, sound lease structure, and statutory authorization for these types of bonds.

VERY LARGE RESERVES: Alaska has set aside very large reserves for UGF operating needs, principally in the Constitutional Budget Reserve Fund (CBR) and Statutory Budget Reserve Fund (SBR), two of the state's most accessible reserves. The realized earnings reserve of the Alaska Permanent Fund also maintains a substantial, accessible balance that is available to fund operating expenses. The state's reserves provide multiple-times coverage of its debt obligations.

VOLATILITY IN OIL REVENUE: The sharp falloff in crude oil prices, beginning in late 2014, lowered the state's expected UGF revenues, exacerbating an already expected revenue shortfall in fiscal 2015. The state plans to apply funds previously deposited to the SBR and CBR to close the identified gap.

CONSERVATIVE FINANCIAL PLANNING: Conservative financial planning is an essential factor given the state's dependency on energy-related revenues and volatility of energy prices and production. Fitch expects Alaska to manage its reserve funds prudently and promptly adjust its expenditures as needed, consistent with the state's historical practice.

ECONOMY AND FINANCES DEPENDENT ON NATURAL RESOURCES: While both natural resources and the federal government have provided sources of employment and income to Alaska's small population, the volatility inherent in the natural resource industry is the state's area of vulnerability. Petroleum-related revenue accounted for approximately 88% of unrestricted general fund revenue in fiscal 2014.

MANAGEABLE LIABILITY POSITION: Alaska's debt burden is moderate. The state has prudently used available cash to fund its capital needs and cash-defeased outstanding obligations when cost-effective. To bolster the funding of its major statewide pension systems, the state deposited \$3 billion from its CBR in fiscal 2015 to improve the funded ratios. In addition, about half of the state's other post-employment benefit obligations are pre-funded.

RATING SENSITIVITIES

The rating on the bonds is sensitive to shifts in the state's GO bond rating to which it is linked.

The state's GO bond rating would be pressured by a prolonged downturn in the natural resources industry, either price or production based, resulting in a sustained reduction in natural resources revenue that is not addressed by state actions to adjust its budget.

CREDIT PROFILE

The bonds are lease obligations of 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.

Alaska's 'AAA' GO rating reflects the state's maintenance of very substantial reserve balances and conservative financial management practices to offset significant revenue volatility linked to oil production from the North Slope and global petroleum price trends. For many years, the state has witnessed a gradual decline in production at its oil fields; however, tax revenues to the state have largely continued to increase as a factor of increased prices for Alaska North Slope crude oil. The state prudently dedicated a substantial share of its oil tax revenue to reserves and has continued to employ long-range forecasting of its revenue, expenses, and natural resources industry. While the Fall 2014 revenue forecast projects modest increases in production in fiscal years 2016 and 2017, the state continues to forecast production declines over the long term.

As part of the state's long-range planning, reserve balances grew exponentially over the past several fiscal years. The sharp drop in crude oil prices in late 2014 increased an earlier anticipated revenue shortfall in fiscal 2015 to \$3.5 billion (58% of unrestricted general fund expenditures) that Fitch expects to be covered by a draw from the state's vast financial reserves. An additional reserve draw of \$3.35 billion is projected by the state based on the governor's proposed budget in fiscal 2016. Despite the planned applications, Fitch believes the state is committed to keeping reserve levels high.

Debt practices are conservative, with limited issuance and average amortization. Employment remains generally stable. Although the state has potential exposure to federal employment, its revenue system limits its budget exposure.