North Dakota's Triple-A Rating Downgraded A Notch By S&P -- February 23, 2016

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.