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AUGUSTA, Maine — Maine’s credit rating remains unchanged despite the severe coronavirus-related economic shock, a positive sign for the state’s future ability to invest in infrastructure and other projects.
Half a dozen states have seen their credit ratings decline since the coronavirus outbreak began, but two firms, Moody’s and Standard & Poor’s, determined that Maine has a stable outlook, the governor’s office announced Wednesday.
A strong credit rating does not mean that Maine will avoid fiscal challenges. In a release Wednesday, Gov. Janet Mills noted that “difficult decisions lie ahead” as the state grapples with the economic effects of the coronavirus pandemic.
But it shows investors are not overly worried about Maine’s ability to pay off future debts. It has the practical effect of allowing the state to continue to borrow money at low interest rates, something Maine has indicated it will take advantage of in the coming weeks and months.
State revenues have taken a serious hit due to the pandemic, but ratings agencies think Maine will still be able to meet its obligations. Maine is staring down significant budget shortfalls, with April revenues coming in at only half of what the state had planned for, while some projections indicate the state could face a shock of more than $1 billion by mid-2021.
A state’s credit rating is essentially an estimate of how likely the state is to pay off debts. Maine’s credit rating has stayed relatively constant over the past decade, with both Moody’s and S&P giving the state the third-highest possible rating. Both agencies affirmed that rating this week and gave Maine a stable outlook, suggesting that the agencies do not see coronavirus-related economic problems as a threat to the state’s ability to cover its debts.
The stable outlook was based on Maine’s “strong financial position” entering the coronavirus crisis and its adherence to “governance best practices,” Moody’s analysts said. Those practices include a clause in the state’s constitution requiring it to pay general obligation debt ahead of other obligations in the event of a revenue shortage.
A better rating means lower interest rates for the state on future bonds, making infrastructure and other projects more affordable. Unlike the federal government, state governments are not allowed to run deficits. Instead, they sell bonds, which are essentially a promise to pay a certain amount of money over a period of time.
States generally use bonds to fund long-term projects that would be too expensive to pay for in a single year’s budget. If a state’s credit rating is downgraded — meaning that investors have doubts about the state’s ability to pay back the bond money — the state would have to sell bonds with a higher interest rate in order to convince investors to buy them.
A higher interest rate makes the bond more costly for Maine in the long run, which could require the state to increase taxes or make cuts in other places. Keeping a stable credit rating now helps Maine avoid such a scenario.
Maine is planning to sell bonds in June. More on the ballot in July and borrowing could be part of the state’s virus response. The treasurer’s office is planning to sell $141 million in bonds in June to fund already-approved projects ranging from highways to senior housing. Voters will have the chance to decide on two additional bonds on July 14.
The first is a $15 million bond to pay for high-speed internet in rural areas. The second is a $105 million transportation bond, which would fund improvements to highways and bridges as well as ports and other infrastructure in the state. The decisions to put those measures on the ballot were made by lawmakers before the pandemic hit.
However, policymakers could look to bonds in the near future as Maine digs itself out of an unprecedented crisis. While Congress is considering proposals to provide aid to state and local governments hit hard by the pandemic, the situation is uncertain. Lawmakers have long seen borrowing as an alternative to raising taxes all at once to pursue big projects.
Watch: Janet Mills announces changes to June 1 reopening phase