May 21, 2019
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Moody’s upgrade stands to lower cost of $115 million in state borrowing

PORTLAND, Maine — The credit rating agency Moody’s Investors Service has upgraded its outlook on Maine bonds to stable, which stands to lower the cost of borrowing on $115 million in state debt to be sold this month.

State officials expect the bonds will be sold between June 12 and June 16, supporting a variety of projects such as highway and bridge construction.

“It is likely to have a beneficial effect that would be difficult to measure,” said state Treasurer Neria Douglass, who said the deal the state receives ultimately depends on market demand from investors, who are considering a variety of factors.

But Douglass said pent-up demand, the Moody’s outlook upgrade and timing of the sale stand in the state’s favor to get a good interest rate, expected to be below 3 percent.

The credit rating on those bonds, which is a third-highest ranking of Aa2, did not change but is below average for U.S. states, according to Moody’s.

It is the first of two ratings the state will receive before taking its debt to market. The other, from Standard & Poor’s, was expected to be made public Thursday night and pricing will be set next week, according to Douglass. The sale of the bonds will reduce the amount of authorized but unsold bonds the state has on its books to around $139 million, from $254 million, Douglass said.

Richard Rosen, a former Republican lawmaker recently named the state’s acting finance commissioner, said the state reducing its unfunded pension liability by 41 percent since 2012 and absolving about $748 million in debt to hospitals played a role in the upgraded credit outlook.

“Two years ago and one year ago, [Moody’s] cited significant issues, and they rewarded the state for addressing those head-on,” Rosen said, noting the service also gave the state high marks for a two-step revenue forecasting process that made state revenue estimates more accurate.

The service said it changed the outlook on Maine’s general obligation bonds because of a “stable revenue picture, progress toward structural balance and actions to address liabilities related to pensions and retiree health costs.”

Moody’s said the rating reflects the state’s slow economic growth, a broad revenue base, manageable debt levels, high pension liabilities compared with revenues, low cash on hand and long-standing negative fund balances, despite a reduction in debt owed to hospitals.

Still, Moody’s noted, the state’s economic recovery lags the rest of the nation, and demographic trends do not stand in the Maine economy’s favor.

Rosen identified rising government spending as a looming threat to the state’s rating in the future, particularly through the state’s Department of Health and Human Services.

The rating service had first downgraded its outlook on Maine’s general obligation bonds in May 2012 and affirmed that outlook in last year.

The service said the state could improve its rating by maintaining positive available fund balances, showing job growth in high-wage occupations and establishing structural balance in the state budget. The rating could drop if the state has more budget gaps that require one-time fixes, more borrowing for regular operations and worsening economic trends.

The state’s bond rating had become a political issue during the last legislative session as lawmakers borrowed from the state’s rainy day fund to lower cuts to its revenue sharing with cities and towns. Gov. Paul LePage said the move would hurt the state’s credit rating and lobbied for a law that replenished rainy day funds using about $21 million in excess funds from state employees’ health insurance accounts and unspent money in the Department of Education.

The latest change in outlook solicited praise from LePage, who said in a prepared statement that the outlook upgrade is “a sign that Republican reforms are working for Maine,” a sentiment echoed in a statement issued by Senate Minority Leader Michael Thibodeau of Winterport.

“This is about hard-fought victories for policies that Republicans have long supported. This report from Moody’s Investors Service shows those policies are finally taking root and improving Maine’s financial outlook,” Thibodeau said.

Speaker of the House Mark Eves, a Democrat from North Berwick, criticized LePage for not submitting to lawmakers a budget proposal during the last session and highlighted Moody’s note that the economy’s recovery still lags the rest of the nation.

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