Maryland could lose one of its prized AAA bond ratings if the U.S. government fails to find a way out of its debt and budget problems in the coming months, state Treasurer Nancy K. Kopp has warned.
Kopp told a Senate committee in Annapolis this week that Moody's — one of the nation's three leading rating houses — has informed state officials that if it decides to downgrade U.S. Treasury bonds, it will also lower the scores of Maryland and three other AAA states. Standard & Poor's and Fitch, the other two, have not given any such warning, she said.
A Moody's downgrade would take away a distinction Maryland and 14 other states wear as a badge of honor. In addition to allowing a state to borrow money at better interest rates than lower-ranked states, a AAA bond rating bolsters a state's reputation for fiscal integrity. Maryland has held the top ranking from all three houses ever since the rankings began, according to the treasurer's office.
David Jacobson, a Moody's spokesman, said Maryland is one of four top-rated states facing a downgrade if the AAA rating for Treasury bonds is lowered. He said Maryland would move down — along with Virginia, New Mexico and Missouri — because of its close economic ties with the federal government.
Jacobson said 11 other Moody's-rated AAA states would retain their ratings even if the nation's debt were downgraded. He said the difference between Maryland's cost of borrowing and the remaining AAA states' would be determined by the market. The agency is concerned about the current deficit talks between the Obama administration and Congress, he said; Moody's had set no deadline for a resolution.
Kopp said that although a downgrade would not be the result of the state's actions, it would still hurt.
"At the very least, we think it sends the wrong signals to the investors and the world at large," she said.
Kopp testified before the Senate Budget and Taxation Committee Tuesday but was unavailable for comment Wednesday. Susanne Brogan, deputy treasurer for public policy, said a possible downgrade does not appear to be imminent and is unlikely to affect the state's next bond sale March 6.
Brogan said the state will be offering $500 million in new debt and refinancing up to $500 million more. She said a downgrade could affect Maryland's next expected bond sale in August.
In her appearance Tuesday, Kopp testified that Moody's said it would downgrade Maryland because of its relatively high ranking on two of five measures of dependence on the federal government. She said Maryland is ranked high in the percentage of its workforce holding federal jobs and the amount of money that goes to the state in federal contracts.
The downgrade would also work its way down to AAA-rated local governments in the region, Jacobson said. They include Howard, Montgomery, Prince George's, Harford and Baltimore counties as well as the state housing department.
Moody's has had both the federal government and Maryland on its watch list in recent months as a result of the federal fiscal instability caused by disputes over the debt ceiling, the looming automatic budget cuts known as sequestration and the failure to agree on a long-term budget plan.
What is new, Kopp said, is that Moody's has notified Maryland that if it downgrades U.S. debt, a lower rating for Maryland would be "almost automatic" — with no opportunity for the state to make a case for keeping its rating.
Kopp said any downgrade would come in spite of a strong workforce, a healthy Rainy Day Fund, progress in reducing the state's long-term revenue shortfall and a 2011 law shoring up its pension system. Brogan said Maryland has held top rankings with the agencies since S&P started rating it in 1961, Moody's in 1973 and Fitch in 1993.