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Moody's Downgrades Outlook for Maine Bonds
05/18/2012   Reported By: Jay Field

One of the three big credit ratings agencies has downgraded its outlook for Maine bonds. The state's general obligation debt load still enjoys an Aa2 rating--called a Double A 2 rating--the third highest that Moody's Investors Service hands out. But Moody's says it's downgrading its forecast that Maine will hold onto to its current rating, from "stable" to "negative" because of the state's ongoing budget problems.

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Maine's biggest problem, as Moody's sees it? "Primarily, its Medicaid rates are going up, quite a bit," says Moody's spokesman David Jacobson. Meanwhile, he says, "Its reserves, at the same rate, are going down. So its liquidy position is starting to narrow because of the lack of reserves."

Now, we should be clear here. Maine's overall credit rating has not changed. Moody's still gives the state's bonds an Aa2--Double A 2--ranking, the third highest the agency hands out.

But by changing Maine's outlook from stable to negative, Jacobson says Moody's is hinting at the possibility that the state's credit rating could be downgraded in the next 12 to 24 months. "So what we're going to be doing is analyzing and studying the situation in Maine over that time period."

The news couldn't have come as all that much of a surprise to policy makers in Augusta. All year, the state capitol has been riven by controversy over what to do to reign in Medicaid spending. Earlier this year, the state faced a $200 million shortfall, due, in large part, to growth in spending on MaineCare.

After an initial round of cuts, the state whittled the deficit down to $80 million. Earlier this week, Republican Gov. Paul LePage signed a state budget rewrite that closes that gap by dropping all 19- and 20-year-olds from MaineCare and making other cuts.

"So we need to continue to move down that path to right-size that program," says State Treasurer Bruce Poliquin. "And that will enable us to start putting aside financial reserves that we need to do in the event that we have another economic downturn. The rating agencies are watching us closely. They expect we'll be able to do that."

Even if it takes awhile, one economist believes Maine's credit rating will remain stable. Charlie Colgan teaches public policy and management at the Muskie School at the University of Southern Maine. "I think there's a long way between here and a downgrade," he says. "And clearly, if the economy would turn around and grow on a more or less sustainable path, the downgrade may never happen."

One other question is whether Moody's change in outlook would make it less likely that the governor will eventually put his signature on a roughly $100 million bond package passed by the Legislature. Don't count on it, says Colgan.

"No, we're way under our bonding capacity," he says. "I don't think it has anything to do with the bond package. It might affect it a year from now, when those bonds might actually hit the market."

Adrienne Bennett, the governor's spokeswoman, says the conversation about what to do about the current bonding proposal may take place next week. She says the Moody's report reaffirms her boss's decision to tackle out-of-control Medicaid and welfare spending.

And she notes that Maine's credit rating was actually downgraded during the administration of LePage's predecessor, Democrat John Baldacci.



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