AUGUSTA – A one-notch downgrade of Maine’s bond rating by a national agency is expected to have a minimal impact on the state’s economy, but it fueled a political debate Wednesday.

Democrats and Republicans responded with press releases highlighting parts of Tuesday’s report from Fitch Ratings Service. The agency downgraded Maine’s rating on $472 million in general obligation bonds from AA+ — its second-highest of 20 ratings — to AA.

State Treasurer Neria Douglass, a Democrat, said the report shows that it’s time to issue voter-approved bonds that Republican Gov. Paul LePage has yet to release.

David Sorensen, spokesman for Republicans in the House, headlined his news release: “Dems Should Heed Advice from Fitch Ratings: Stop Picking Political Fights, Join in GOP Solutions.”

Fitch didn’t spare either side in its report.

The report says LePage’s recent openness to issuing the bonds, for example, “could substantively increase the state’s debt load.” It also said that the contentious relationship between LePage and legislative Democrats raises the likelihood of “increased conflict” over the budgeting process.

Fitch cited as good news the approximately $1.7 billion in long-term savings from public pension reforms that Republicans passed in 2011. It also said Maine has low debt and pays its debt off quickly.

The bad news, it found, is more substantial. With flat revenues and uncertainty about the future work force because of an older population than the national average, the release noted several major issues.

• Budget shortfalls: Fitch said the state has “limited options” to solve budget problems, which include separate shortfalls in the current budget of $35.5 million and $112 million, and a $756 million shortfall projected for the next two years.

• Weak reserve levels: This is partly related to the administration’s proposal to use $40 million of $44.5 million in a reserve fund to help balance this year’s Department of Health and Human Services budget. That could hurt the state’s ability to respond to budgetary emergencies, Fitch said.

• Bonds: LePage’s proposal to issue $105 million in voter-approved general obligation bonds under certain conditions, including legislative support for a $100 million plan to virtually rebuild the Maine Correctional Center in Windham, could increase Maine’s debt load, it said.

• Tax cuts: Fitch said cuts passed in 2011 will result in $342 million in forgone revenue in the next two-year budget.

Charles Colgan, an economist at the University of Southern Maine’s Muskie School of Public Service, said Fitch’s findings suggest the state manages debt well but has financial and policy issues.

He said the findings suggest that LePage may be able to pay hospitals and issue voter-approved bonds, but it may not be prudent to push a bond for the corrections project, too.

Democrats argue that the voter-approved bonding, along with other investment in infrastructure, is needed to boost the state’s economy.

Assistant Senate Majority Leader Seth Goodall, D-Richmond, said he found LePage’s prioritization of the Windham correctional center bond surprising, noting that legislators didn’t hear of the idea until it showed up in the governor’s proposed budget.

Assistant Senate Minority Leader Roger Katz, R-Augusta, said legislators were caught off-guard, and “the governor has an education and sales job to do to convince 186 (legislators) that that’s our highest priority.”

There could be some common ground on certain budget solutions.

Katz and Goodall acknowledged that the report was clear that structural changes are needed. Both identified DHHS as a place to look for efficiencies. In a press release Wednesday, LePage echoed that, saying such changes are needed to improve the state’s financial standing.

Goodall and Katz differed on the revenue side. Goodall said proposals that bite into LePage’s tax cuts are on the table for Democrats, most of whom campaigned against them in 2012. Katz said the cuts, which took effect this year, haven’t been given time to help Maine’s economy.

Goodall said the report showed that “folks on Wall Street are paying attention” to LePage’s “antagonistic nature.”

However, Colgan said he doubts that Fitch is concerned about any conflict between Republicans and Democrats.

“Governors going up against legislators is old news,” he said.

A Fitch spokeswoman said the company’s chief analyst for the report was unavailable for an interview Wednesday.

 

Staff Writer Michael Shepherd can be contacted at 213-0182 or at:

mshepherd@mainetoday.com