- The Washington Times - Monday, September 15, 2003

RICHMOND — Whether state government loses its superlative Wall Street credit rating depends largely on what the General Assembly does to shore up its nearly depleted “rainy day” reserve fund, the Warner administration said yesterday.

A downgrade by Moody’s Investors Service of Virginia’s AAA bond rating would be the first blemish ever to the state’s creditworthiness rating, and its consequences would likely be more psychological than fiscal, Finance Secretary John M. Bennett told House budget writers.

Moody’s last week put Virginia on a credit watch list for a potential downgrade of the optimum bond rating it has enjoyed since 1938. Two other bond-rating houses, FitchRatings and Standard & Poor’s, have issued no such warnings to Virginia.

A weakened bond rating can drive up the state’s costs of credit through the issue of state-backed bonds for such long-term capital needs as construction projects at state-supported colleges.

Virginia is among eight states that enjoy a perfect bond rating. If Moody’s decreases Virginia’s rating but the other two institutions keep the state rated AAA, the effect on borrowing costs will be minimal, Mr. Bennett said.

“The issue is larger than that, and that’s why governors from as far back as I can remember have touted the triple-A as they view it as a sign that these agencies regard Virginia as in the top tier of all states,” Mr. Bennett said.

“So it’s not financial as much as it is the specter that if more than one downgraded us, it would be a sign that they view us as no longer in the top tier of states,” he said. “That’s more of a concern to me than the loss of the two basis points.”

Moody’s is particularly bothered by the huge drain on the state’s reserves, much of which were used to help reconcile state budgets $6 billion short of their forecasts since January 2002, he said. The fund, about $900 million two years ago, is about $130 million now.

Mr. Bennett and other top administration officials are scheduled to meet with Moody’s analysts in New York later this month.

“What they want to see is whether we have enough options available — options they judge as feasible options — to bring about the kind of budget stability they expect of a triple-A state,” Mr. Bennett told the House Appropriations Committee.

“They want to see a pristine balance sheet or, if one isn’t available, they want to know there are steps available that we can move toward one,” he said.

Committee Republicans, however, were dissatisfied with the Democratic administration’s plans for protecting the state’s bond rating.

“In my business, I’ve got to have a Plan A, Plan B and a Plan C. I think telling this committee or telling Senate Finance that we have options and that we’ve got to wait to see till January is not going to be satisfactory to the public or to the members of the General Assembly,” said Delegate S. Chris Jones, Suffolk Republican, and a pharmacist.

Mr. Bennett said that Moody’s realizes that only the legislature can fundamentally restructure the state’s budget, that lawmakers may not follow the administration’s script doing it, and that the General Assembly doesn’t reconvene until January.

“Moody’s doesn’t care whether we raise taxes or cut spending. All they want to see is a budget where revenues are in general balance with spending and a healthy reserve,” Mr. Bennett said.

Until business rebounds more, particularly in Northern Virginia, revenues will struggle to keep pace with such spending commitments as skyrocketing mandated costs for Medicaid over which the state has no control, Mr. Bennett said.

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