When the three major Wall Street bond rating agencies reaffirmed Maryland's AAA rating last week, Gov. Martin O'Malley issued a news release crediting his administration's "fiscally responsible approach" to budgeting. Given the extent to which Mr. O'Malley's fiscal stewardship has come under attack during the race to succeed him — even in the Democratic primary — that may strike many Marylanders as laughable. But the agencies' letters explaining their decisions are worth a closer look for what they say about the state's underlying fiscal strength and the ways Mr. O'Malley has improved it.
An important thing to bear in mind when reading bond rating analyses is that the firms — Moody's, Fitch and Standard and Poor's — have a different definition of "fiscally conservative" than most people do. They're not talking about whether a state has low taxes or is frugal in its spending. Their concern is whether the state is likely to make good on its payments to bondholders. From their perspective, a state's willingness to raise taxes is just as good as its willingness to cut spending when circumstances warrant, and as the agencies note, Maryland has done both repeatedly during the last several years. The agencies look at the underlying strength of a state's economy — Maryland's is comparatively strong, last year's federal government shutdown and sequestration cuts notwithstanding — and the tools a state can bring to bear if things go wrong.
On that front, Mr. O'Malley inherited some structural advantages: a requirement in the state constitution that general obligation bonds be paid off within 15 years (30 is more common), limits on how much debt the state can issue and the ability through the Board of Public Works to quickly make spending cuts without the involvement of the legislature. But having that power is not enough; the state has to be willing to use it proactively, and Mr. O'Malley did, repeatedly during the recession and again early this month in what amounted to a course correction for a budget that had only barely gone into effect. Whether the most recent cuts will prove sufficient is unclear, but his track record suggests that Mr. O'Malley will not hesitate to seek further spending reductions in the waning months of his term if it's necessary.
One of Mr. O'Malley's fiscal practices that we have criticized — his habit of diverting money meant for Program Open Space to the general fund, and then paying for open space acquisitions through bond proceeds — actually gets a positive notice from one of the agencies as a sign of Maryland's flexibility to meet changing needs. So did the shifting of some teacher pension costs to the counties — a move we supported but which many others did not. But what emerges from the analyses is that perhaps the most important thing Mr. O'Malley has done for the state's long-term fiscal health was also one of the more politically difficult initiatives of his term: the pension and retiree health benefit reforms of 2011.
Mr. O'Malley won office with the support of public employee unions, and he'll want that support again if he runs for president. Nonetheless, at the beginning of his second term, he proposed reforms including new limits on cost of living increases, higher contribution rates for many workers and a longer vesting period. Another set of reforms to state retiree health care plans cut the nearly $16 billion unfunded liability for those benefits in half.
When Mr. O'Malley proposed his reforms, it sparked large protests outside the State House. But the pension system was only 64 percent funded at the time, having been on a downward slide since late in former Gov. Parris Glendening's term, both because of a change in the way the state calculated its annual contributions to the fund and the stock market turmoil of the 2000s. The O'Malley reforms had the effect of both limiting the growth of pension costs for the state and accelerating the pension system's return to full funding, thanks to the state's decision to reinvest a portion of the savings into the fund. Governor O'Malley and the legislature backtracked on that commitment somewhat this year — a decision we and others, including the pension system itself, opposed — but that drew at most a mild rebuke from the rating agencies.
The governor's race will, appropriately, feature a debate about Mr. O'Malley's fiscal legacy — even Lt. Gov. Anthony Brown is advocating an overhaul of the state's tax structure. The validation of the rating agencies doesn't necessarily mean that the state's budget policies are the best ones, and there are warning signs in this year's preliminary tax receipts that the state may face more short-term trouble in the months ahead. But Maryland was a AAA state when Mr. O'Malley became governor, and despite the worst recession in decades, it is on track to be in an even stronger position when he leaves. He deserves some credit for that.
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