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Risky business: Bill puts Maine’s credit rating on the line

Posted May 04, 2012, at 5:26 p.m.

Maine’s good name — our credit rating — is at risk, and along with it our ability to build a stronger economy.

In February, Fitch Ratings Inc., one of the most influential credit rating agencies, changed its outlook for Maine’s creditworthiness from “stable” to “negative,” putting the state on notice that our high AA+ rating is in danger of being downgraded. Fitch warned that their rating “is dependent upon the state’s ability to … meaningfully rebuild reserves depleted during the recession.”

Unfortunately, the Legislature’s Appropriations Committee is considering a bill, LD 849, that would jeopardize Maine’s credit rating by doing the very thing Fitch warns against.

The state’s credit rating drives our ability and cost to borrow for investments in roads and bridges, water systems, telecommunications, schools and research centers, and other public assets on which our economy depends. These are crucial investments that create jobs and a more competitive business climate.

The higher our credit rating, the lower our interest rates. Maine always has maintained strong credit ratings because of our low debt ratios and rapid repayment of general obligation bonds relative to other states. We pay in 10 years where other states take twenty. Maine’s historically good credit rating is in danger if lawmakers give final approval to LD 849.

Credit rating agencies such as Fitch, Moody’s and Standard & Poor’s evaluate Maine’s financial management practices and assign a credit rating. That rating tells the world whether the state is a good credit risk. Just like when you apply for a loan and your banker looks at your personal credit score, if your score is low, you either can’t get a loan or you pay more in interest.

Rating companies like stability and predictability. As with a home loan, they want to know that the state can pay off its debt (sufficient income to meet needs), that it has collateral for emergencies (reserves), and that it takes care of what it already owns (roads, bridges, buildings in good repair). But LD 849 would drain state revenues, making Maine unable to cover its obligations, and deplete state reserves.

Combined with deferred maintenance on much of the state’s infrastructure, LD 849 will make it very difficult if legislators want to maintain or improve the state’s credit rating.

LD 849 would reduce the amount the state puts into reserves at the end of the year and use that money to lower income taxes permanently. This immediately raises red flags for the rating agencies. Rating agencies don’t like “time bomb” tax cuts such as those being proposed. In September 2011, Moody’s pointed out that “tax changes leading to revenue reductions leave [Maine] vulnerable.” Lowering tax rates without a plan for how to replace lost revenue, as was done last year and is proposed in LD 849, is a poor way to do business.

Faced with lost revenue, there are two alternatives — cut services such as police protection, snowplowing and education, all of which threaten our families’ safety and make it harder for our kids to get good jobs; or shift the cost of providing these vital services to property tax payers. Either way, Maine loses.

Gov. Paul LePage has said repeatedly that the state can’t afford to finance construction needs and other economic investments, but the credit rating agencies disagree. In fact, they consider maintaining physical infrastructure to be good financial management. To do otherwise creates a backlog that the state never will be able to erase and undermines budget stability and predictability.

Standard & Poor’s said in an October 2011 credit report for Maine, “We view the lack of a formal and detailed capital planning process as a constraining factor,” meaning Maine does not do a good job of anticipating and meeting our needs for roads and bridges, clean drinking water and modern schools. The governor’s refusal to issue bonds is an extreme case of poor planning, particularly when interest rates are at historic lows and our ability to borrow is well-documented.

Maine cannot afford LD 849. It is a risky proposal that will undermine the state’s credit rating, resulting in higher interest rates and ultimately higher costs to taxpayers. It will jeopardize our ability to provide basic public services on which families and businesses rely. It will erode the quality of our schools, transportation system, communications network and other job-creating assets.

Instead Maine should take every opportunity to build its reserves and make badly needed improvements in roads, utilities, education and other key ingredients of a strong economy. It took decades to build Maine’s solid financial reputation. Let’s not ruin it with LD 849.

Jody Harris is a policy analyst with the Maine Center for Economic Policy.

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