All three credit rating agencies have warned Maine to get economic house in order since LePage
Downgrade could happen with unfair tax policies, more cuts to services and lack of reserves
BY RAMONA DU HOUX
June 5th, 2012
“While the health care jobs have been an economic driver over the course of the recent recession, the state’s efforts to reduce spending on social services, especially Medicaid, may reduce future growth prospects for that sector,” wrote Moody’s Investors Services, one of Maine’s credit rating agencies.
This was one reason why Moody’s dropped Maine’s bond rating to AA negative from AA positive. Some economists have said that the negative stamp is a warning to the state to review policies that might endanger job growth. From 2002 to 2010 job growth occurred mainly in healthcare, manufacturing and innovation sectors.
Moody’s also saw problems with the lack of funds in the state’s rainy day fund. The agency cited a, “weak general fund liquidity position reflecting the lack of reserves.”
Moody’s, Standard & Poor’s and Fitch are the three main agencies that rate debt issued by governments and corporations.
In February, Fitch Ratings Inc., one of the most influential credit rating agencies, changed its outlook for Maine’s creditworthiness from “stable” to “negative.” Fitch warned that their rating “is dependent upon the state’s ability to … meaningfully rebuild reserves depleted during the recession.”
S&P also served notice in the past eight months that Maine’s rating is in jeopardy because of tax changes that widen revenue gaps and deplete reserves. After the bond package was announced this agency change their outlook to stable.
All three agencies credit rating is the same – AA. The different outlook of S&P reflects their economic philosophy. The worrying common factor is that all three agencies found it necessary to warn the state. An actual downgrade to A could seriously damage Maine’s reputation and hurt the state’s economy.
The nearly $500 million in unfunded tax cuts for the wealthy passed by the Republican majority in the legislature and LePage during the past eighteen months has caused concern among these credit rating agencies.
During the Baldacci administration substantial cuts were made largely with consolidation efforts and the state still managed to increase the rainy day fund, and pass bonds for economic growth, until the recession hit.
During an interview with WGME when Gov. LePage first came to office he was asked about the state’s rainy day fund.
“On Jan. 5, when I was inaugurated, there was not enough money in the rainy day fund to buy dinner,” he said.
In reality the fund balance was $25.4 million when LePage took office, according to budget numbers posted on the Legislature’s Office of Fiscal and Program Review website. The state also had a surplus of over $100 million because, in part, corporate profits were higher than anticipated.
Those corporate profits, in many cases, were directly related to Baldacci’s Pine Tree Development Zone (PTDZ) initiative, which encourages companies to move to Maine or expand in the state by giving them tax incentives, and the removal of the BETR equipment tax.
• Twelve corporate companies headquartered in Maine were included on the 2010 Inc. 500/5000 list of the fastest growing, privately held companies in America.
• According to the Maine Development Foundation, from 2007 to 2008 the state of Maine experienced greater growth in per-capita personal income than the nation—3.9 percent compared to 2 percent. Then the Great Recession hit. Still, from 2009 to 2010, Maine’s personal income grew by 3.5 percent.
• According to the Maine International Trade Center between 2002 and 2008, Maine exports rose over $1 billion. In 2010 Maine became the 5th fastest growing state for exports.
• 2002 to 2010: 309 companies located to Maine or expanded their businesses here, because of PTDZ incentives. They represent 8,206 jobs.
Despite the recession when Gov. Baldacci left office the state was in the black and had a rainy day fund.
“Since the LePage administration, all three of the major credit rating agencies have warned Maine that our current budget and tax policies put the state at risk for higher interest rates and lower investor confidence,” said Mark Sullivan, of the Maine Center for Economic Policy. “Irresponsible budget cuts are hurting seniors, children, people with disabilities and families struggling to make ends meet. Massive tax cuts and other changes to our state tax policies adopted over the past two years will widen revenue gaps, deplete reserves and undercut our capacity to fund critical infrastructure needs.”
Moody’s report stated that “A rating downgrade could be triggered by: the emergence of further significant budget gaps in the current biennium or future fiscal years; the absence of a clearly articulated plan to achieve meaningful improvement in the state’s available reserve position in the near term; cash-flow strain stemming from reduced liquidity; or a slower than average economic recovery that hinders revenue growth.”
LD 849, a new tax law, could trigger a credit rating downgrade.
According to the nonpartisan fiscal office of the Maine Legislature, full implementation of LD 849 as written would cause losses to Maine schools, roads, bridges, and towns totaling over $1.2 billion per biennium. This is because this TABOR style measure lowers taxes irresponsibly, and would force the state to cut back needed programs to make up for lost tax revenue.
In times of emergency the state has a rainy day fund but this new tax law raids this fund to pay for lowing taxes to 4 percent. So without any back up revenue programs would have to be cut to balance the budget. This tax law was promoted as a law that would bring a flat tax rate to Maine. But people, schools, law enforcement . . . communities all rely on state government assistance. If their funding is cut they have to turn elsewhere for help. Municipalities would be forced to raise property taxes to make up for the lack of state funding. This grand plan to cut taxes actually shifts the responsibility of funding programs to local municipalities.
“We’ve heard loud and clear from the credit agencies that this bill puts Maine’s credit rating at risk,” said Rep. Seth Berry, who sits on the Legislature’s Taxation Committee. “This is nothing short of an unfair and unfunded tax shift onto middle class families who are already paying enough in property taxes.”
Analysis by Maine Revenue Services shows the Republican bill, would give an average tax reduction of only $1 to the bottom 20 percent of income earners. By comparison, the tax cut would give an average reduction of over $21,000 to the wealthiest 1 percent of Maine residents.
“We were even given strong warnings by Fitch about this very issue before the Republicans passed Sen. Courtney’s TABOR tax bill that ratchets down the income tax to 4 percent by raiding the state’s rainy day fund,” said Rep. Berry.
In September 2011, Moody’s pointed out that, “tax changes leading to revenue reductions leave [Maine] vulnerable.”
LD 849 was bullied through the legislature by Republican votes. No Democrat voted for the tax shifting law.