By Ilana Kowarski
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State Treasurer Nancy Kopp
As fiscal brinkmanship continues in Congress, state treasurer Nancy Kopp warned a Maryland Senate committee that a federal sequester and the resulting cuts to the state budget could result in a downgrade of Maryland’s triple-A credit rating from Moody’s Analytics, one of America’s three major credit rating agencies.
On Tuesday, Kopp told the Senate Budget and Tax Committee that she recently had discussions with Moody’s representatives. She argued that Maryland’s educated workforce and “conservative budget” make it worthy of the agency’s highest credit rating. But the agency has refused to budge on its position that Maryland’s creditworthiness depends upon the outcome of Washington budget negotiations.
“There is this cloud on the horizon,” Kopp said. “If those ladies and gentleman on Capitol Hill can’t get it together and reach the consensus that Moody’s wants, then they will downgrade the United States, and they might downgrade Maryland, too.”
Moody’s gave notice in 2011
Moody’s gave notice that it might downgrade Maryland’s credit rating in 2011, when it issued a “negative outlook” on the state’s financial health in midst of the U.S. fiscal cliff crisis, when a federal sequester seemed like a real and immediate threat to the nation’s economy, just as it does now.
Sequestration would result in deep cuts in federal aid to states and sharp reductions in federal spending on defense, social services, and other programs. Moody’s argued that these across-the-board spending cuts would have a disproportionate impact on Maryland, because of its proximity to Washington, the high concentration of federal workers in the state, and the large number of federal contracts distributed locally.
Moreover, the firm has a policy that it does not give a state or province a higher credit rating than its sovereign nation. So if they downgraded the United States’ credit rating, they would automatically downgrade Maryland’s, unless Kopp can convince them to make an exception in the case of her state. That is what she has been trying to do.
Maryland could lose millions
The precise cost of a downgrade is unclear, but Kopp says that the state could lose millions of dollars if its credit rating is downgraded, since investors would be unwilling to accept the current low rate for state bonds. When people invest in state bonds, they generally pay more for AAA-rated ones, because they are the most secure, and they do not want to risk losing their principal due to a debtor’s bankruptcy. State and municipal bonds are also tax exempt.
Kopp argued that lowering Maryland’s rating would be completely inappropriate. “We’ve been triple-A rated ever since they [Moody’s] started giving ratings, and we think the state is stronger than it’s ever been,” she said. “A downgrade would send the wrong message to investors.”
Downgrade unlikely before March 6 bond sale
She added that any potential downgrade is unlikely to occur before the state auctions off $500 million worth of bonds on March 6, which will shield Maryland from some of its anticipated costs if the rating downgrade cannot be avoided.
At the present time, Maryland’s debt service obligations — the moneys required to pay the principal and interest on bonds — exceed the state property tax revenues that are supposed to pay those debts. Bond premiums that banks and investment firms pay to purchase high-quality issues are no longer sufficient to make up the difference.
Legislative analyst Patrick Frank said that he hopes that tax revenues will rise as the state recovers from the Great Recession, since that would improve the state’s credit situation. But he agreed with Kopp that a bond rating downgrade would be a formidable obstacle.
I can’t imagine Kopp has a scintilla of a chance to influence Moody’s, using logic like this:
“If those ladies and gentleman on Capitol Hill can’t get it together and reach the consensus that Moody’s wants, then they will downgrade the United States, and they might downgrade Maryland, too.”
Moody’s negative outlook (2011) was based on four concerns:
-Continuing budget pressure
-Low retirement system funded levels
-Above average debt burden
-Reliance on federal jobs in era of retrenchment
Since 2011, Maryland has aggravated each of these concerns. For instance, it paid approximately 64% of the “required payment” into the pension fund, by far the lowest percentage in the last four recessionary years. Maryland added substantially to its debt burden and now pays a material part of its operating expenses from borrowed money.
O’Malley claimed in his State of the State that his pension’s financing problem was “fixed.” I kid you not, check the text of his address. I suggest the problem really was papered over and obscured with actuarial legerdemain.
The irony is that credit downgrades by Moody’s or anyone else will not create the greatest change to MD costs of money. The market itself will by far have the greater influence on interest rates. And there is no doubt the trend will be higher rates. Just last week 10-year Treasuries crossed the 2% threshold and are headed above 3% in the short term. I trust the legislature knows that the difference between 2% and 3% is not a 1% increase. It’s a 50% increase.
It’s about time that the ” Magical Thinking & Believing ” people who infest our state government get a rude awakening to the world of reality. Overspending and floating bonds to cover the lower revenue has consequences and now it’s time to face them !
I voted against every bond issue on last November’s ballot and any other time that they appeared just for this reason… Too bad other Marylanders voted “for” them !
This story won’t be reported by WBAL,WJZ,WMAR,WBFF, the Baltimore Sun…But, naming the raven as state bird ( I thought we already had one ), and naming the soft crab sandwich as the “state sandwich” are newsworthy !
They will downgrade Maryland Mrs Kopp because you have advocated to spend more then what is taken in. Also the courts will order money that is due from the lawsuit to be paid by a federal court order in a form of seizure. That is the reason Maryland will get a downgrade you fool.
“Conservative budget”? I’d call it status quo in Annapolis. With the state budget increasing year after year during a recession & the brilliant legislators enacting 23 additional “revenue enhancements” this is a good plan? So we can’t fully pay the principal & interest on current bonds because of less $$ collected from state property taxes & the $$ from bond premiums from banks & investment firms can’t make up the difference yet she says everything is A OK? If I’m not mistaken didn’t Ms. Kopp recently vote to increase the state’s debt load & call that good for Maryland? Driving us deeper into debt is good. Raising taxes, fees & tolls is good. Basing a majority of our state economy on fed jobs & gov contractors while chasing out private businesses is really smart? I don’t get it. I just don’t get it.
Nancy Kopp can do Maryland residents a favor and resign for the stupidity she started. Do your Job and pay the court order lawsuit or the courts will take your powers away from you that you already abused.