Slipping state revenues, persistent budget gaps and “an increasingly contentious decision-making environment” have led one of the nation’s three main credit rating agencies to downgrade Maine’s general obligation bond debt a notch, to “AA” from “AA-plus.”
The downgrade by Fitch Ratings reflects the agency’s assessment of the state’s $472 million in general obligation bond debt. Fitch this week also cut its rating on $1.4 billion of Maine Municipal Bond Bank general resolution bonds to A-plus from AA-minus.
The rating downgrades came as part of a routine surveillance process, Fitch said. The agency’s rating is an assessment of the ability of a state, city, business or other entity to repay loans. While Fitch’s highest credit rating is AAA, the AA rating still denotes “expectations of very low default risk” and “strong capacity for payment of financial commitments,” according to Fitch.
The downgrade from Fitch is unlikely to affect the interest rates Maine is paying on outstanding bonds, said James McConnon, a professor at the University of Maine School of Economics. But the change in rating is a sign Maine could be forced to pay higher interest rates when it issues new debt.
“It may signal a change in interest rate in the future depending upon how the state responds to the specific concerns that the bond rating house has,” McConnon said.
In its rating statement, Fitch cited continued budget pressures as a result of state revenues that have come in below expectations and a $100 million shortfall that has developed in the state’s Medicaid program. Fitch noted that Gov. Paul LePage’s proposal for balancing this year’s budget relies largely on digging into state reserves, a move that could affect the state’s ability to react to future budget challenges.
The rating agency also noted that Democrats took control of both chambers of the Legislature in November, “raising the likelihood of increased conflict with the Republican governor over the supplemental budget and the biennial budget.”
LePage so far has refused to meet with the Democrats’ new legislative leadership. And last week, when LePage met with three independent House members who haven’t joined the chamber’s Democratic or Republican caucuses, the governor reportedly swore, pounded a table and stormed out of the meeting when the lawmakers brought up their concerns about LePage’s budget proposal.
Lawmakers from both parties say they maintain hope that all sides ultimately will arrive at a budget compromise. But The New York Times on Tuesday highlighted “the frosty relations” among LePage and Democratic legislators.
While Fitch lowered its rating of Maine’s bond debt, the agency also noted some positives for the state.
Maine generally has maintained low levels of debt, Fitch said, and the agency praised a state pension reform package passed by lawmakers in 2011.
Fitch also noted that while Maine’s economic recovery has been “sluggish,” the state’s economy has remained stable compared with the national economy. In addition, state government is responsive when reacting to budget shortfalls, the agency said.
“The state historically addresses budgetary challenges in a timely and proactive manner,” Fitch wrote.
While no state or business welcomes a credit rating downgrade, Fitch’s rating for Maine’s bond debt is still high, said McConnon, the University of Maine economics professor.
“I think right now, it’s important to take a look at the reasons for the downgrade,” he said. “To the extent the state can address those adequately, it may result in a future upgrade or no change.”
And whether Maine ultimately pays higher interest rates also depends on the ratings of Moody’s and Standard & Poor’s, the other two primary credit rating agencies.
“You’ve got one downgrade and a negative outlook,” said Charles Colgan, a former state economist and a professor of public policy and management at the University of Southern Maine’s Muskie School of Public Service. “That’s kind of cumulative evidence that something’s not good.”
In May, Moody’s maintained Maine’s Aa2 rating — the third-highest — but lowered the state’s outlook from stable to negative, citing Medicaid spending overruns and a low level of cash reserves. Earlier this month, Moody’s issued a warning that Maine could face a future downgrade after federal officials denied the state permission to make as many cuts to its Medicaid program as the LePage administration had sought.
Standard & Poor’s last May affirmed Maine’s AA rating and revised its outlook for the state to stable from negative.
LePage said the downgrade from Fitch wasn’t surprising, given that one of the reasons the agency cited was cost overruns in the state’s Medicaid program.
“Without flexibility from the federal government, and growing Medicaid expenses, Maine will continue to be plagued by massive shortfalls in its budgets as a direct result of expanded welfare programs,” LePage said in a statement released by his office.
Democrats took news of the Fitch rating downgrade as a sign that LePage needs to adopt a more collaborative style. And they also lamented the slow economic growth cited in the Fitch report.
“Gov. LePage’s current approach to the budget and revenues needs to be more collaborative and less like the obstructionist approach of Republicans in Washington,” House Speaker Mark Eves, D-North Berwick, said in a statement.
Republican legislative leaders accused their Democratic colleagues of playing politics with the Fitch report.
“We have been trying to rein in MaineCare costs for two years, and each time we meet stubborn obstructionism from the Democrats,” assistant House Republican leader Alexander Willette, R-Mapleton, said in a statement.
State Treasurer Neria Douglass, a Democrat who was sworn in to her position earlier this month, said Maine should issue bonds that have been authorized by voters but not yet issued.
LePage has said he doesn’t plan to issue those bonds until next year unless the state can rein in spending. But LePage said last week he would issue bonds this year if lawmakers sign off on his proposal to pay off $186 million the state owes its hospitals for Medicaid services.
“The projects voters approved will create jobs and provide the foundation for a better economy,” Douglass said in a statement.
Reuters contributed to this report.