The Smart Money: Downgrading Maine

Posted Tuesday, February 25, 2014 in Analysis

The Smart Money: Downgrading Maine

by Gina Hamilton

Gov. Paul LePage recently reneged on an agreement to sell some bonds that the voters of Maine had approved in 2010 for infrastructure and other things.  He had agreed to sell the bonds in late July, after the hospitals were paid for their Medicaid debt.  His Finance Commissioner, Sawin Millett, signed off on the sale, and worked with Treasurer Neria Douglass to set up dates for the sale in June of 2014.

The reason he changed his mind, after Douglass had already fronted nearly $60 million in Treasury monies to the agencies and entites that were to receive the funds, much of it already spent, was that he was upset that the Legislature chose to continue its agreement with Maine’s municipalities to share the wealth, such as it is, through the process called revenue sharing.

Specifically, LePage was upset that the Legislature, being thwarted by veto threats if they attempted to solve the problem by reversing LePage’s tax cuts, which were the initial reason for cutting funds for revenue sharing in the first place, borrowed the funds from the Budget Stabilization Fund, also known as the Rainy Day fund.

But the interesting thing about this story is that LePage said he was acting to prevent a downgrade of Maine’s credit rating. Commissioner Sawin Millett had earlier urged the Democratic majority not to take funds from the Rainy Day fund. 

Millett, a nine-year veteran of the Department of Administrative and Financial Services, said Monday that he was hopeful that the funds would be returned, and that “another solution” could be found before the revenue sharing dollars were actually needed, in FY 15.  He seemed confident that if the funding was restored, the bonds would go through as scheduled.

The rating agencies were less concerned about the exact amount of funding in the Rainy Day fund, and more concerned about the uncertainty the current political brouhaha is causing.  An analyst at Moody’s said on Monday afternoon, “Any rating agency is going to be a lot more concerned about uncertainty in any financial system than in the actual number of dollars here or there.” He said that while no single item would cause an agency to downgrade Maine’s rating, the sudden $60 million deficit, which could not be made up easily, was far more of a concern than the Rainy Day fund’s passbook balance.

Millett wasn’t surprised to hear that. 

Another analyst, not connected to either Moody’s or Standard and Poor’s, said recently that such a situation could cause a significant downgrade, that would essentially prevent Maine from issuing bonds in the future.

LePage’s office is not returning calls on this issue. However, Douglass’ office is. And the Treasurer knows exactly what’s at stake, and is doing everything in her power to prevent Maine from ending up with a $60 million deficit, the one thing all of them are constitutionally forbidden from doing.  Millett, too, is working quietly to try to solve the problem with what he called a “timing solution”.

So LePage’s gambit ... to force the Democrats to return funds to the Rainy Day fund ... may end up working temporarily.  

But the longer term problem ... uncertainty in the “financial system” of Maine ... won’t be so easy to undo. Signing off on a bond issue, allowing your treasurer to advance funds from the treasury, and then reneging on the agreement, is a bright red flag for rating agencies.  It demonstrates a significant problem with the power balance in a government, and a disregard for the full faith and credit of the state treasury. 

And for Maine, there is only one workable solution for that.  Which may be the “timing solution.”

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