Tardy audits bring Anchorage, Alaska, a negative rating outlook

Anchorage, Alaska had its ratings outlook revised to negative by Fitch Ratings, because of tardy audits and the potential for a diminished financial resilience assessment by the agency, ratings analysts said.

In Thursday’s rating action, Fitch affirmed at AA the city’s issuer default and general obligation bond ratings and the AA-minus rating on its lease revenue bonds. It also affirmed the AA-minus rating on its convention center refunding bonds and assigned a stable outlook to those bonds.

The negative outlook affects about $1.1 billion in combined GO and lease revenue debt, said Pascal St. Gerard, Fitch senior director and western regional manager for U.S. Public Finance.

The city blamed staffing challenges and problems with its IT system for the severe delay on its fiscal 2022 audit, which came out 589 days past the fiscal year-end, more than double the standard 270 days, according to Fitch’s report.

But the city assured Fitch its financial staff is back to full strength and it should have its 2023 audited financials completed by third quarter 2025 and the 2024 audited financials complete by first quarter 2026.

The delayed 2022 audit has had the knock-on effect of causing the fiscal years 2023 and 2024 audits to be very delayed, St. Gerard said.

“The challenge is they have all the same people completing all the audits and they have to be done sequentially,” St. Gerard said. “They have to get the 2023 done, in order to confirm the data, or make adjustments, in the next one.”

A combination of retirements and people leaving city employment to work for state agencies resulted in the shortage of financial staff, he said.

Timing on when a downgrade could come — if Fitch takes that step — is contingent on how well the city does in adhering to its timeline to get caught up on its audits, St. Gerard said. But that doesn’t necessarily mean an automatic downgrade if the city doesn’t produce its fiscal 2023 audit in September or October, as promised, St. Gerard said.

If the delay beyond the city’s promised time frame is because it’s at the printing press or the city council needs to vote on it to make it official, it probably wouldn’t receive a downgrade, St. Gerard said.

If the city adheres to its timeline to complete the fiscal 2023 audited financial in third quarter 2025 and fiscal 2024 in first quarter 2026, they would be caught up, he said.

“It’s not the case they are experiencing economic distress, it’s just that they need to complete the audits to substantiate what they have said and to show that an auditor has reviewed the books,” St. Gerard said.

Revenues for the city of 209,000 were down in the years immediately following the COVID-19 pandemic, because the number of cruise ships visiting Anchorage declined, St. Gerard said. The city was also waiting for federal reimbursements for infrastructure repairs from the 2018 earthquake that have since been paid, he said.

Spending on earthquake repairs and the large-scale IT project had reduced reserves to 4% for fiscal year 2023, but federal reimbursements should return the city’s reserves to between 7.5% and 10% of spending, Fitch said.

If the city doesn’t return reserves to that level and is not on track to grow them back to 12%, the city’s reserve policy level, it could put negative pressure on the rating, St. Gerard said.

The city was dinged in the Fitch report for its declining population, but the ratings also benefit from the city’s economic and institutional strength, as the city serves as the “population hub for the state and is home to numerous institutional anchors including a large military installation and the state’s large university.”

S&P Ratings downgraded Anchorage’s bond rating to AA-minus from AA in July 2024 citing turnover in the chief fiscal officer position and negative fund balances in fiscal years 2021 and 2022 and the delayed release of the fiscal 2022 audited financial statement.