AUGUSTA, Maine — Earlier this month Standard & Poor’s Rating Service sent a shiver through lawmakers and Gov. John Baldacci when the outlook on some Maine bonds was revised from stable to negative, a step that could lead to a downgrading of the state’s credit rating.
“There are two things that S&P said they were concerned about,” Finance Commissioner Ryan Low said in an interview last week. “One was the general liquidity of state finances — having enough cash on hand. We used the rainy day fund for the budget last year, and we know that is an issue. The other thing we heard was a concern that we address the budget quickly.”
He said state officials knew there was a possibility the state outlook could go from stable to negative based on discussions with S&P before the Maine Governmental Facilities Authority sold bonds earlier in the month.
“We knew we had to start building our reserves back up,” Baldacci said in an interview last week. “That’s why we put money in the change package that will go to the rainy day fund so we can start to build that back up.”
He said S&P had three areas of concern, and all were addressed. He said that in addition to cash flow and cash reserve needs, the rating agency considered it a plus that the budget be brought into balance without a tax increase.
The budget that lawmakers will consider this week includes $7.1 million for the Budget Stabilization Fund, which nearly everyone refers to as the rainy day fund. The funds are available because lawmakers are counting as received $81 million from the federal government for an extra six months of Medicaid funds at the higher rate in the recovery act.
“We got it done with unanimous legislative committee support, Republican and Democrat, and not only that, we did it without raising taxes and did it with putting money into the reserves,” Baldacci said. “I think we hit it out of the park.”
Nonetheless, members of the Appropriations Committee from both parties are concerned about the S&P action. The state plans to sell general obligation bonds in June and the credit rating forms again will review the state’s fiscal health and set a rating that can affect how much the state pays for the money it borrows.
“Absolutely, I am concerned,” said Rep. Emily Cain, D-Orono, co-chairman of the committee. “But we have addressed the concerns raised by the bond rating firms; we are balancing the budget, we are putting money away in case it is needed.”
She said lawmakers were right when they used the reserves last year to fill a hole in the budget caused by the recession. She also agreed with Baldacci that it is important to start building up the reserves again with the recession continuing and ongoing worries that state revenues again could falter.
“We don’t know if we are out of the woods yet,” Cain said.
Sen. Richard Rosen, R-Bucksport, the GOP senator on the committee, said the panel has to be concerned because a lowered credit rating could cost future generations a lot of money.
“This is something that has to be taken seriously,” he said. “It has future budget implications if the credit agencies were to lower our rating.”
Low said he is not worried the state will get a lower rating, given what has been done in the budget and what happened at the sale of the government facilities bonds right after the S&P watch notice.
“It did not have an impact,” he said. “I think that was because we have a good history and we have an aggressive debt retirement schedule. We pay our bonds off in 10 years.”
Cain said even with concerns over the rating, lawmakers should consider sending additional bonds to the voters this year as “needed investments” in the state’s future. The panel has public hearings today on several bonds, including a $99 million package proposed by Democratic legislative leaders and a $79 million package proposed by Baldacci.
“There is not much enthusiasm among Republicans for any additional bonds,” said Rep. Sawin Millett, R-Waterford, the ranking GOP member on the committee. “A year ago at this time we had less than $200,000 in the budget stabilization fund. With the amount we have set aside we are now at $16 [million] to $17 million, and I think that sends a strong message to the bond rating firms. We don’t want to add to future debt obligations. ”
He said that while revenues appear so far to have stabilized based on reprojections in February, there is still uncertainty whether revenues will continue to meet the new estimates over the rest of the two-year budget.
While the panel set no money aside to pay for any debt service on new bonds, they did put the $2.4 million Baldacci had in his budget package into unallocated surplus. If it were not used, it would end up in the reserves at the end of the budget year.