Democrats are Dooming Maryland’s AAA Bond Rating
One of the things that has been evident for years in Maryland is that our AAA Bond rating is sacrosanct, and that politicians will stop at almost nothing in order to protect the bond rating. Except it turns out the the Democrats that have been running the financial show in Maryland for most of the last hundred years have been our state in the precarious position of losing that bond rating.
Confirmation of the continuing slow economic growth came Friday with the report that Maryland lost 11,000 jobs in June, the third worst performance in the nation. The governor and labor secretary both emphasized that these numbers have been revised upward in the past, and there are still 28,000 more people working now than there were a year ago. But growing jobs at about 1% a year is hardly enough to put recent college graduates to work, not to mention the long-term unemployed. That’s why the employment rate has continued to rise.
Some of those job losses might already be due to cutbacks by federal contractors preparing for the “fiscal cliff” the U.S. government faces come January. The Defense Department will have its budget reduced in big ways or small, but enough to affect the federally dependent Maryland economy. And there’s not much the state can do about it.
The outlook on Maryland’s Aaa rating is negative due to its indirect linkages to the weakened credit profile of the US government. The negative outlook relates to Moody’s August 2, 2011 decision to confirm the Aaa government bond rating of the United States and assign a negative outlook, and to our December 7 assessment of the state’s exposure to indirect linkages to the federal government. Moody’s has determined that issuers with indirect linkages, such as Maryland, have some combination of economies that are highly dependent on federal employment and spending, a significant healthcare presence in their economies, have direct healthcare operations, or high levels of short-term and puttable debt.
Once again, the Democrats reliance on federal largess continues to potentially cripple the state economy. I’ve been talking for years about the misguided belief of Maryland’s Democratic leadership that we have a recession-proof economy. Yet year after year, Maryland Democrats continue to raise taxes, raise the cost of living for Maryland’s workers, and raise the cost of doing business here in the state of Maryland. The result, of course, is lower tax revenue, fewer taxpayers residing in the state of Maryland, and fewer jobs for Maryland’s residents. Yet the Democrats have always assumed that the federal government, through the expansion of federal programs or the distribution of federal dollars through Maryland-based contractors, would continue to save Maryland’s fiscal day. With impending cuts in federal spending on the horizon (especially with sequestration on the horizon on January 1st) that source of revenue and jobs is likely to dry up or be severely curtailed.
It isn’t just irresponsible spend-and-tax policies that are dooming our AAA bond rating. As we have reported on at RM for years, Maryland’s mismanagement and underfunding of its pension funds is also going to come back and haunt us in the very near future:
The funded levels of Maryland’s retirement system represent a credit challenge for the state. The state ranks among the top 20 in its ratio of unfunded pension liabilities to GDP, well above the norm for its Aaa-rated peers. The reported funded level is low at approximately 64% as of June 30, 2011. This represents a decline from 87.8% from June 30, 2005 and is at a lower level than most similarly-rated states. In addition to asset losses associated with the financial crisis, the deterioration in funded status stems from the enactment in 2002 of a corridor funding method that results in contributions that are less than actuarially required when the pension system has a funded ratio of less than 90%. In fiscal 2011, this resulted in a state payment of $1.378 billion compared to the actuarially required rate of $1.914 billion.
So Maryland has a sluggish economy, diminishing tax revenues, increased spending, and pension liabilities that are currently severely unfunded and have the potential to swamp us in upcoming years, irrespective of the implementation of the teacher pension shift to the counties.
The AAA bond rating may be sacrosanct. But Martin O’Malley and the Maryland Democratic leadership has brought us to the brink of losing that bond rating, and to the precipice of an unmitigated fiscal disaster…