Alaska Railroad credit rating gets hit after Senate's $30 million funding cut

WASHINGTON — Moody's Investors Service has lowered the outlook for Alaska Railroad bonds from stable to negative, saying the U.S. Senate's move to gut the railroad's budget could leave it short of money to pay off debt.

The action applies to $135 million in Alaska Railroad bonds backed by federal dollars. The bonds mostly pay for track work, as well as collision avoidance technology and purchasing and renovating equipment.

Moody's said it was lowering the credit rating assigned to the Alaska Railroad bonds from A1 to a still solid A2. But it also said the rating is going to drop much further if the U.S. House agrees with the Senate plan to cut about $30 million from the railroad and the state doesn't step in with a bailout.

"The outlook is negative, reflecting the risk of future credit deterioration in the event that Congress passes (the legislation) ... Such measures would leave insufficient revenue for debt service in that event -- and in the absence of state support -- a significantly lower rating would be indicated," Moody's said.

A credit rating downgrade makes it more expensive for the railroad to borrow money in the future. The railroad hasn't heard from the other two major credit rating agencies, Fitch and Standard & Poor's, but the union that represents its train crews said last month that such a big budget cut could force the railroad to lay off a third of its employees, dramatically reduce passenger services and default on its bonds.

The management of the state-owned railroad corporation says it would try to avoid bond default all costs and is working to figure out what such a cut would mean. The railroad says the cut would reduce its Federal Transit Administration grant funding from about $35 million down to between $2 million and $10 million.

A cut of about $30 million would represent a major blow for the railroad, which last year had $13.4 million net income on total revenues of $188 million.

"We've got lots of different ways to look at it but everything comes around to the fact it's not good," railroad CFO Bill O'Leary said in an interview on Monday.

O'Leary said the railroad is working with Alaska Rep. Don Young to try and prevent the cut.

"There's a long way to go on this thing," he said. "We're going to work our darndest to make sure everyone understands the story and what the implications are."

The House and the Senate are fighting over what to do about transportation spending with no end in sight. Congress just passed a three-month extension of the federal transportation program to buy more time to sort it out.

The issue for the Alaska Railroad is language the state's congressional delegation put in the 2005 transportation bill setting up how the railroad would be funded. The Senate banking committee is taking the position that it was an earmark and that this year's transportation bill will have no earmarks.