When buying a home, an individual typically borrows money from a bank and repays the loan over a number of years. The bank relies, in part, on an independent credit rating to determine if the home buyer is able to repay the loan. The higher the credit rating, the lower the interest payments.
State governments go through a credit evaluation in order to borrow money to build roads, bridges, and other costly infrastructure projects. Governments normally borrow these large sums by selling bonds to investors. Investors rely on three rating agencies to assess creditworthiness: Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings.
In March, 2010, S & P announced that Maine’s AA “stable outlook” general obligation bond rating had deteriorated to a “negative outlook.” A negative outlook is not a downgrade, but it can lead to one if our financial situation doesn’t improve. A downgrade would likely cost taxpayers higher interest payments on the bonds we sell, as investors would demand a higher return for the additional risk.
In evaluating Maine’s creditworthiness, the rating agencies are primarily concerned with the state’s weak cash-flow position.
Our low-wage economy struggles to generate enough tax revenues to pay the bills on time without infusing one-time federal stimulus money and not paying hospitals. That’s why it’s so important to control government spending and build a business-friendly climate. Gov. LePage’s proposed budget includes welfare reform savings, a tax cut for families and one for businesses to help them grow and create jobs.
The resulting increased tax revenues will improve our cash flow and be looked upon favorably by the bond rating agencies.
The rapidly rising annual payments for the current pension benefits for teachers and state employees, and those needed to pay-off the accumulated $4.3 billion pension shortfall, are also dampening cash flow. Next year’s $443 million pension payment by the taxpayers is that much less cash our state government will have to fund essential services like public education and road repair. The proposed budget includes reforms that reduce the pension debt and annual payments by more than 50 percent. If approved, these adjustments will stabilize the budget and allow the state to make targeted, strategic investments.
When possible, state government sets aside money in a “rainy day fund” to help its cash flow needs, and to smooth the impact of economic ups and downs on the budget. After being depleted during the past two years, Governor LePage is attempting to replenish this account over the long run. A growing financial cushion will demonstrate to the bond rating agencies that our cash flow situation has improved.
Maine’s weak balance sheet is also a concern of the rating agencies. The new administration is trying to strengthen our financial position by paying off hospital and pension liabilities. Correcting this nagging issue will elevate our standing with the rating agencies.
Since being sworn-in as state treasurer of Jan. 6, I’ve been reaching out to the Maine taxpayers, informing them about our long-term fiscal problems, including the $4.3 billion pension debt. (I write this in my capacity as treasurer, and not as member of the Maine Public Employee Retirement System board of directors.)
In response to my “gloom and doom” forecasts, Rep. John Martin D-Eagle Lake, was quoted in the March 27 Maine Sunday Telegram saying that if our bond rating was lowered, I would be “singularly responsible.” Rep. Martin further asked “How is he going to make the picture rosy, because that’s the role of the treasurer and the role of the governor?”
TIME FOR STRAIGHT TALK
This couldn’t be farther from the truth. My responsibility to the Legislature and the hard-working people of Maine is to explain the unvarnished reality about our long-term fiscal challenges. Moody’s, Standard & Poor’s, and Fitch know more about Maine’s financial issues than most in Augusta. They’ve been crunching the numbers and rating our bonds for many years.
Rep. Martin has been in the legislature for 32 years, many in leadership roles. I’ve been on the job for three months. I look forward to working with him and his fellow legislators to persuade state government to spend less, tax less, and regulate less. This will attract business investment and jobs, and help keep our young Mainers here.
Our cash flow will improve, and we’ll have more tax revenues to rebuild our infrastructure and educate our kids. Then, Maine’s public officials won’t need to paint a rosy picture for the bond rating agencies, or anyone else. It’ll be here, clear as day, for all to see.
- Special to the Telegram