Banks collapse: How do our cities compare?

Recently, regional banks in the US and one major international bank have either collapsed or, in crisis, been rescued by larger banks due to liquidity issues. Given these financial headwinds, great time to assess the financial viability of the Municipality of Anchorage as voters decide how to vote on the many bonding propositions on the ballot.

In November 2022, Anchorage had their bond rating (credit score) downgraded by Fitch, citing the Muni’s depleted cash reserve levels which was not adequate to cover 10% of the Muni’s current year expenditures in its general fund. That means the Muni was required to have about one month’s annual expenses in cash in order to maintain its rating - it did not. Later, Fitch updated its rating notes after finding the Muni could borrow up to $640 million in cash. Basically it found that the Muni’s liquidity issues were solved because the Muni had a “credit card” with a $640 million limit. Not the place of financial strength one would hope for and not how we the voters run our personal finances. Financial advisors suggest families have 3-6 months of cash on hand, the Muni has less than a month.

Contrast that with the MatSu Borough, in 2022 Fitch maintained the Boroughs bond rating, although the Borough was not seeking to borrow any money, and cited the strong cash reserve position for the rating. MatSu Borough has roughly 2 month’s annual operating expenses and one year of its annual debt service on hand.

The Muni and the Borough also differ what type of capital projects they take on and how they pay for them. For example, the Muni is seeking in this current election cycle to bond to repair roofs, replace worn out equipment, or rehabilitate a trail - essentially bonding for maintenance, a dubious financial position to be in. Contrast this with MatSu Borough paying $25 million for a new school this year - with cash. Two years ago, MatSu voters approved a roads package - adding roads, not repairing them - again the Borough paid cash. MatSu has increased its school enrollment by 64% in the last 10 years - yet paying for schools with cash and not bonding.

In addition, the cost of borrowing has increased. The average loan in 2020 was 3.7%, versus the current 7%. The Fed just bumped rates a quarter point this week. Any new bonds (debt) added to the Muni, would cost about 1.5 times what that same liability would have cost per month in 2020. Similarly, short term lending to cover monthly expenses, or the $640 million in borrowable cash, also will increase the Muni’s monthly expenses.

Given the problem the Muni has with low cash reserves and the substantially increased costs of bonding, its not the time to add more debt. Let’s learn lessons from the bank failures and MatSu’s example of being financially prudent in regards to taking on additional debt. It’s not the right time to add more debt to the Muni monthly expenses, rather, we should wait until the Muni replenishes its cash reserves before taking on anything in the short term.