Weekly Wrap: Rating Agency Slams Conn. on Borrowing

By: - October 30, 2009 12:00 am

States’ increasing use of borrowing to resolve their financial problems is not escaping detection by the agencies that rate bonds. Moody’s Investor Services rapped Connecticut on Monday (Oct. 26) by downgrading the state’s credit outlook from stable to negative. Moody’s specifically mentioned the General Assembly’s issuing of $947 million in bonds to help cover last fiscal year’s shortfall.

Moody’s said these one-time budget fixes “create future structural budget gaps and leave the state with significantly reduced flexibility to address additional fiscal pressures that may arise due to a delayed and/or weaker than expected recovery from the worst economic recession since the depression.”

A demotion in a credit outlook is more like a warning than a penalty. If Moody’s were to take a more punitive step such as lowering the credit ratings of Connecticut’s bonds, the interest costs it pays to retire the bonds would go up, adding to the state’s borrowing expenses. Gov. M. Jodi Rell (R) said the downgrade was “an alarm signal that we clearly cannot afford to ignore.”

A Moody’s report issued in July said state debt nationally rose to $417 billion in 2008, up 132 percent from 1998. The practice has alarmed financial analysts who say states are creating serious future financial problems. But many state officials say they have few options in a recession that has squeezed tax revenue.

The same day that news of Moody’s rebuke of Connecticut spread through Hartford, Illinois Gov. Pat Quinn (D) broached borrowing $900 million in short term debt to pay for college scholarships and possibly health care costs. The Chicago Tribune noted that the state already has borrowed $2.25 billion to balance its budget and has delayed payments on bills worth another $3.7 billion.

The three major rating agencies have come under attack this year from several state officials who blame the groups for contributing to the economic crisis by giving favorable ratings to mortgage-related securities that were backed by risky loans. A U.S. House panel voted Wednesday (Oct. 28) to tighten regulation of the credit rating agencies.

One of the keys to economic recovery and the nation’s future growth is access to high speed Internet service, especially in rural areas. The Obama administration committed $7.2 billion in stimulus money to expand broadband access, with the first grants scheduled to be awarded in November.

Make that December now. On Wednesday (Oct. 28), federal officials told Congress of a delay in processing the 2,200 grant applications. Larry Strickling, head of the federal agency distributing the money, said, according to the Wall Street Journal , “We’re going to take a few more weeks here to get this right.”

The U.S. Government Accountability Office released testimony detailing a large number of applications, short time period for review and limited staffing. GAO said it was concerned that federal officials would hand out all of the money by the September 2010 deadline. The administration is trying to distribute the bulk of the federal stimulus money as quickly as possible to meet the goal of creating or saving 3.5 million jobs.

Today (Oct. 30) is when the nation gets its first good look at the impact of the $787 billion federal economic stimulus package on creating jobs. The goal is 3.5 million jobs; the administration has estimated 1 million jobs created or saved so far. Go to the recovery.gov Web site to check out the numbers.

USA Today has pegged the gains at 388,000 jobs, which it said were a significant boost to the economy. The Houston Chronicle said it could not determine from the Web site where the money actually has been spent. A spokesman for the Recovery Accountability and Transparency Board told the newspaper that the data scheduled to be released Oct. 30 will be more definitive.

Meantime, there was good reading for stimulus watchers on the editorial page of the New York Times on Tuesday (Oct. 27). Its editorial , “The Case for More Stimulus,” says that state governments will not recover from the recession this year and will still need federal assistance.

“Without another round of effective stimulus, the worst recession in modern memory will likely become-at best-the weakest recovery in modern memory. Another boost to federal spending that is targeted and timely should not be too much for politicians to deliver,” the editorial concluded.

The Washington Post took a look at sort of the macro impact of the federal economic interventions, including the stimulus, concluding that “the structural changes occurring in the economy are so great that they will take far longer to play out than the government can maintain policies to support growth.”

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Stephen Fehr

Stephen Fehr is a senior officer with Pew’s government performance portfolio. He is a lead writer on many of the products generated by the portfolio, specializing in state and local fiscal health.