From Investor Village:
North Dakota lost its Standard & Poor's triple-A rating because
of the impact of oil price volatility on the state's economy.
S&P lowered the state's issuer credit rating one notch to AA-plus
late Thursday. The rating agency also lowered the state's appropriation
debt rating one level to AA from AA-plus, and the state's moral
obligation-backed debt rating by two notches to A-plus from AA. The
outlook on all the ratings is stable at the lower level.
"The
downgrade reflects our view of increased volatility in the state's
economy that has translated into a projected $1.074 billion, or 22%,
general fund revenue shortfall for the 2015-2017 biennium," said
Standard & Poor's analyst Carol Spain.
"We were dismayed that S&P downgraded North Dakota's AAA rating,
especially because the state has planned for possible downturns by
building up our reserve funds and protecting the structural balance of
our budget by focusing on one-time infrastructure investments verses
ongoing operations," said Office of Management and Budget director Pam
Sharp. "We believe the financial condition of the state is still very
solid."
This month North Dakota dipped into its $572 million
budget reserve to the tune of $497 million to help cover a $1 billion
shortfall in revenue for the 2015-2017 biennium triggered by falling
crude oil prices. The budget forecast assumes West Texas Intermediate
crude oil prices of $30 per barrel as of January 2016 that gradually
transition to $43 per barrel by June 30, 2017. [Comment: I think this is way too optimistic.]
The
state had already implemented across-the-board budget cuts of 4.05% to
make up for the shortfall in a $6 billion general fund budget for the
current two-year cycle that began in July 2015. Another $75 million
remains in the reserve fund, which is earmarked to provide further
relief if the economy hasn't turned around by the state's next revenue
forecast, which is scheduled for the summer.
S&P had previously cited
North Dakota's
strong reserves as a credit strength mitigating its vulnerability to
oil sector decline. However the February drawdown on reserves increases
the state's susceptibility to a downturn in the oil industry.
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