AUGUSTA — Citing depleted budget reserves, ongoing shortfalls, a slow economic recovery and “an increasingly contentious decision-making environment,” the Fitch Ratings Service on Tuesday downgraded the state’s borrowing status.

The downgrade, from AA+ to AA, is not expected to increase the borrowing cost of the state’s $472 million in outstanding general obligation bonds, which have been approved by voters. But it could affect interest rates on future bonds.

The downgrade follows a warning Jan. 15 by Moody’s Investors Service that Maine’s persistent Medicaid problems could hurt the state’s credit rating.

The downgrade by Fitch, a national rating agency, is also certain to fuel the debate over the fiscal course pursued by Gov. Paul LePage.

The governor has enacted initiatives that Fitch applauded in its ratings review, including an effort in 2011 to pay down the state’s pension debt for public employees. The agency also cited the state’s quick responses to budget shortfalls and its low debt ratio as positive factors.

But repeated shortfalls in the state’s Medicaid program and little hope for increased revenues played into the downgrade.

Additionally, Fitch said the potential for increased tension between LePage, a Republican, and the new Democratic majority in the Legislature makes the state’s fiscal outlook even more uncertain.

The agency cited LePage’s $6.2 billion, two-year budget proposal and a supplemental budget designed to bring the state’s current budget into balance. The $112 million supplemental budget relies primarily on one-time budget fixes, including using $40 million of the $44.5 million in the state’s Budget Stabilization Fund, often called the rainy day fund.

LePage’s plan to further deplete already low reserves was cited by Fitch, which noted that it limits the state’s ability to respond to economic volatility.

The agency also noted that the governor’s budget relies on spending cuts, including a contentious proposal to suspend $200 million in municipal aid. That proposal, the review said, raises the “likelihood of increased conflict” between LePage and lawmakers.

That conflict centers on the $400 million tax cut package that lawmakers approved in 2011. The package is contributing to a $756 million gap in the next two-year budget, beginning July 1.

LePage’s budget is designed to protect the tax cuts.

Fitch noted the tax cut in its analysis, saying the state has foregone $342 million in revenue by passing the plan in 2011.

The analysis also noted that the governor’s proposals to borrow to pay the state’s $187 million Medicaid debt to hospitals and undertake a $100 million overhaul of the Maine Correctional Center in Windham would add to the state’s debt load.

The downgrade by Fitch was seized by Democrats as proof that policies enacted by LePage and the governor’s unwillingness to work with Democrats on a budget solution are hurting Maine’s.

“We were sent to Augusta to work together to strengthen our state,” said Senate Majority Leader Sen. Seth Goodall, D-Richmond, in a prepared statement.

“Unfortunately, this report is picking up what many of us have known too long – some are focused on rhetoric and not results.”

The LePage administration have consistently attributed the state’s economic climate to the policies of the Democratic-led legislatures that ruled prior to the governor’s election in 2010. 

State House Bureau Writer Steve Mistler can be contacted at 620-7016 or at:

smistler@pressherald.com