The outlook on nearly $500 million in Maine bonds has been downgraded by a debt-rating agency, just weeks before the state launches a bond offering.

Moody’s Investors Service cut the outlook from “stable” to “negative,” citing Maine’s weak financial reserves and high Medicaid costs.

The lower outlook, just weeks before a $55.8 million bond offering, creates the risk of a rating downgrade over the next 12 to 24 months, Moody’s said. That could increase the state’s borrowing costs, analysts said.

“The short-term impact is none. The long-term impact will depend on if we see any downgrade,” said Robert Lenna, executive director of the Maine Municipal Bond Bank.

Some analysts said that once an outlook is changed to negative, the chances of a formal downgrade are high since the state must do an enormous amount of work to resolve Moody’s concerns.

“It’s fait accompli. It’s going in the wrong direction,” said Joe Cuetara, senior vice president at Moors & Cabot, an investment firm in Boston. “It’s so hard to be upgraded. It’s easy to be downgraded. You really want to hold on to your good rating.”

Moody’s said the negative outlook “reflects Maine’s recurring challenges on the spending side of its budget, primarily in the Department of Health and Human Services, which includes Medicaid.”

Spending for MaineCare, the state’s Medicaid program, was one of the most contentious issues of the legislative session that ended Thursday. Over Democrats’ objections, the Legislature voted Tuesday to reduce MaineCare benefits as part of a package to close an $83 million budget shortfall in the Department of Health and Human Services.

The rating agency also cited a lack of reserves or liquidity in the state’s General Fund. That leaves Maine with limited options to handle unexpected shortfalls, Moody’s said.

Moody’s affirmed the rating of Aa2, third-highest, on the $498 million in general-obligation bonds and assigned the same rating to the upcoming bond offering.

State borrowing also was an issue in the Legislature this week. Lawmakers approved five bond packages totaling $95.6 million. The bills await the signature of the governor, who has 10 business days to veto bills, and would need final approval from voters in November.

Speculation in the State House was that the bond issues would be likely candidates for vetoes.

Moody’s said Maine politics played no role in the outlook change, which it made Thursday. Moody’s said its decision came with the upcoming issuance of bonds and coincided with a routine review.

The concern with Moody’s action is the potential for a rating downgrade. That could be triggered if there are significant budget gaps, an absence of a plan to meaningfully improve the state’s reserves in the near term, or a slower-than-expected economic recovery that hurts revenue growth, Moody’s said.

In February, Fitch Ratings Inc. changed its outlook for Maine’s creditworthiness from “stable” to “negative.” Standard and Poor’s also has said Maine’s credit outlook is negative because of smaller reserves than necessary.

State officials said they have been in talks with national rating agencies about Maine’s credit rating during the past several months.

“I appreciate the helpful guidance from Moody’s as Maine continuously strives to improve its credit rating,” said state Treasurer Bruce Poliquin.

“I note that Moody’s recognized the positive financial impact of state government eliminating $1.7 billion of our unfunded public pension liability last year. This year, the rating agency acknowledges the long-term financial health of our ongoing initiative to right-size our Medicaid program.”

Poliquin said Moody’s action was unconnected to the upcoming $55.8 million bond offering and the $95.6 million bond package that is on the governor’s desk.

Democrats said the Republican-led Legislature and administration triggered Moody’s move with policies, such as L.D. 849, a bill to reduce income taxes, that “would put Maine in a continual budget crisis.”

“Despite warning after warning from credit agencies, from economists, from Democrats, and even people within their own party, they’ve proven that the only direction their fend-for-yourself economic agenda is moving Maine is down,” said Maine Democratic Party Chairman Ben Grant.

In addition to Medicaid costs, Moody’s cited concerns about Maine’s reserves.

The issue came into focus with the passage of L.D. 849, which calls for the state to take money out of excess revenues to lower the income tax, after some of the money is used for other purposes.

Analysts said Moody’s move causes no immediate financial concern, but the negative outlook and threat of a downgrade could hurt future bond offerings.

“The real implication is looking forward, when the state and other borrowers next go to market,” Lenna said. “They’ll need to talk to the market about what Moody’s concerns were, about what happened and what the state is doing to address the concerns.” 

Staff Writer Jessica Hall can be contacted at 791-6316 or at:

[email protected]

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