AUGUSTA — A one-notch downgrade of Maine’s bond rating by an agency should have minimal effect on the state’s economy, but it made for political hay Wednesday at the State House.
Democrats and Republicans responded with blaring news releases, highlighting parts of the Tuesday report from Fitch Ratings Service, detailing its downgrade of Maine’s rating on $472 million of general obligation bonds from AA+ — its second-highest of 20 ratings — to AA.
Democratic Treasurer Neria Douglass said the report showed it’s time to issue voter-approved bonds Republican Gov. Paul LePage has withheld, while House Republicans spokesman David Sorensen headlined a missive “Dems Should Heed Advice from Fitch Ratings: Stop Picking Political Fights, Join in GOP Solutions.”
To Douglass’ point, Fitch said the means by which LePage recently announced that the bonds could be issued “could substantively increase the state’s debt load.”
To Sorensen’s, the agency also said a contentious relationship in Augusta between LePage and legislative Democrats raises the likelihood of “increased conflict” about the budgeting process in Augusta.
Fitch found some good and bad in Maine — the good being about $1.7 billion in long-term savings on public pension reforms LePage and Republicans passed in 2011, and Maine has low debt and pays it off quickly.
The bad, it found, is more substantial. With flat revenue and uncertainty about the future workforce because of an aged population compared to the national average, the release noted major issues within state government:
* Shortfalls: Fitch said the state has “limited options” to solve budget problems, which include $35.5 million and $112 million shortfalls in this year’s General Fund and Department of Health and Human Services budgets, respectively, and a $756 million shortfall projected for the next two-year cycle.
* Weak reserve levels, exacerbated in part by the LePage administration’s proposal to use $40 million of $44.5 million in a state reserve fund to help balance this year’s DHHS budget, which the department overran mostly because of higher-than-expected Medicaid costs. This could hurt the state’s ability to respond to budgetary emergencies, Fitch said.
* Bonds: LePage’s proposal to issue $105 million voter-approved general obligation bonds, which includes paying Maine’s $186 million share of hospital debt off with money from a yet-to-be-negotiated new liquor contract and a $100 million bond to virtually rebuild the Maine Correctional Center in Windham, could incresase Maine’s debt load, it said.
* Tax cuts: Fitch said a LePage-championed package cut passed in 2011 will result in $342 million in forgone revenue in the next two-year budget cycle.
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, and therefore it recommends lenders charge higher interest rates on borrowed money.
To Colgan, the findings suggest LePage might be able to pay hospitals and issue voter-approved bonds, but it may not be prudent to push the corrections bond with the other two types of bonds.
“It’s possible that you could do all three things,” Colgan said. “I think it would be a stretch, given on top of the income tax cuts and the slow growth that’s going to be the case for the next two to four years at the minimum.”
Democrats argue the voter-approved bonding, along with other investment in infrastructure, is needed to ramp up the state’s economy.
Given that, Assistant Senate Majority Leader Seth Goodall, D-Richmond, said he found LePage’s prioritization of the Windham correctional center bond surprising, adding that legislators didn’t hear of the idea until it showed up in the governor’s proposed budget.
“If this was such a big issue for such a large project, why haven’t we heard more before now?” Goodall said. “And in light of all that, when we’re struggling in other areas, roads and bridges especially, why aren’t we supporting those projects with all our effort?”
Assistant Senate Minority Leader Roger Katz, R-Augusta, said legislators were caught off-guard by it, 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 the report was clear that structural changes are needed. Both identified DHHS as a place to look for efficiencies. In a news release Wednesday afternoon, LePage echoed that, saying those 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 yet.
As for Maine’s political climate, Colgan, the USM professor, said he doubts Fitch is concerned about conflict between Republicans and Democrats. A Fitch spokeswoman said the company’s chief analyst for this report was unavailable for an interview Wednesday.
“Governors going up against legislators is old news,” Colgan said. “That is not going to worry Wall Street.”
Colgan, a former state economist, said Augusta has “personality issues on all sides.”
To Goodall, who said LePage hasn’t been forthcoming about details on plans and has evaded requests to meet with legislators, the report showed “folks on Wall Street are paying attention” to LePage’s “antagonistic nature,” with the potential caveat that “the Legislature and him may not be able to work together to address our challenges ahead.”
“To have the leader of Maine not work closely with us is disappointing,” he said.