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Moody’s
signals it’s ready to lower state’s credit rating
Moody’s
Investors Service revised its outlook for $2.5 billion in
North Carolina bonds from stable to negative, saying in a July
13 bulletin that it’s seriously concerned about
“reductions in the level of state reserves, a decline in the
state’s audited GAAP year-end fund balances, and the
slowness to restore long-term structural budget balance.”
Moody’s, one of three national credit rating agencies, said
it will make a final determination on the state’s credit
worthiness after the General Assembly adopts a budget.
However, it’s widely expected that, unless the legislature
takes some significant steps toward increasing state revenues,
Moody’s will strip the state of its cherished Triple-A
credit rating.
The full text of the
Moody’s letter is reprinted below.
North Carolina is one of only 10 states that enjoy the highest
credit rating, and thus pays the lowest interest rates when it
issues bonds. It’s one of only five states that have had the
Triple-A rating for the past 30 years. A reduction to a
Double-A rating likely would mean an increase of two-tenths of
a point in the interest rate North Carolina will pay when it
issues new bonds. The state plans to sell $300 million in
higher education and water/sewer bonds in September and
another $300 million in March. Bond sales of similar size will
follow regularly over the coming years as the state issues the
rest of the $3.1 billion university and community colleges
bonds from this past November and prior bonds.
Gov. Mike Easley said the action by Moody’s underscores the
need for lawmakers to raise taxes. “Today’s notice from
Moody’s indicates that the bond raters are clearly watching
the legislative budget process very closely,” Easley said.
“This re-emphasizes the importance that the General Assembly
take action to find revenues in addition to the cuts that we
have already made.”
State Treasurer Richard Moore said the state must act to
address the long-term structural stability of its budget to
protect its credit rating. Moore said the state must have
sufficient recurring cash flows to meet current and future
needs and maintain cash reserves to meet unexpected
emergencies. “This is a credit watch,” Moore said.
“It’s awfully hard to put the genie back in the bottle.”
Text
of Moody's Letter
Moody's has revised its outlook to negative on the State of
North Carolina AAA GO rating, affecting approximately $2.5
billion of debt. The state of North Carolina has experienced
recent economic and financial stress as a result of several
major one-time events, now complicated by a slowing economy.
Adoption of the fiscal 2002 budget has been delayed as state
elected officials debate policy options for restoring budget
balance for the biennium. While serious efforts are being made
to take the necessary actions to address these problems, the
state's lasting financial difficulties and the ongoing
economic slowdown have led Moody's to this changed outlook.
The negative outlook is based upon reductions in the level of
state reserves, a decline in the state's audited GAAP year-end
fund balances, and the slowness to restore long-term
structural budget balance. These trends reduce the financial
flexibility of the state to address additional unanticipated
adverse events should the economy weaken or recovery be
delayed.
North Carolina has historically demonstrated its commitment to
maintain a sound financial position by using cautious
budgeting principals. Following a period of recession-induced
strain in the early 1990s, financial balance was readily
restored through tax increases and expenditure reductions.
With resumed economic growth throughout the mid-to-late 1990s,
the state funded tax cuts while continuing contributions to
pay-as-you-go capital and budget reserves.
Audited financial operating
results have shown declines in fund balances in recent years,
and a sizable GAAP surplus has turned negative. Much of this
decline can be attributed to one-time expenses. In 1999 the
state used rainy day funds to make the $400 million
court-ordered payments as part of the settlement of litigation
regarding the taxation of government retirement benefits. In
addition, subsequent draws on the rainy day fund in fiscal
2000 were made primarily to pay additional court payments and
to aid victims of Hurricane Floyd, further reducing reserves.
The Budget Stabilization Reserve Fund, which totaled $522.5
million at the end of fiscal 1999, dropped to a low $37.5
million at the end of fiscal 2000, due to transfers from the
reserve. The fiscal 2001 budget includes a $120 million
appropriation to the fund, brining the balance currently in
the reserve to $157 million.
North Carolina experienced strong economic growth throughout
the 1990s, as reflected in the measures of job gains, personal
income growth, population, and net migration. However,
employment growth in North Carolina slowed significantly in
2000, to a moderate 1.97%, dropping below the national rate
for the first time in the last eight years. The slower growth
was due in large part to the continued drop in manufacturing
employment, as well as slower growth in the services, finance
and trade sectors. This has led to a rise in the state's
unemployment rate, reversing the decreasing trend experienced
by the state since 1993. Similarly, in terms of personal
income, North Carolina personal income per capita in 2000 was
$27,914, equal to 91.6% of the U.S. figure. The 3.7% growth in
the state's personal income per capita under-performed the
national rate of 4.1%, ranking 30th in the nation.
Further, the state tax collections came in approximately $141
million below budget estimate for fiscal year 2000. Similarly,
as of May 31, 2001, revenues were $762 million below budget
for fiscal year 2001. This revenue under-performance over the
last two years can be attributed to the slowing of the state's
economy. In addition, multi-year tax reductions have
cumulatively reduced revenue collections by an estimated $1.3
billion annually as of the current fiscal year.
Overall, while North Carolina's economy is still growing and
diversifying, it is growing at a slower rate than in recent
years. State revenue estimates have been based on the
continued slowdown in the state's economy as well as the
impact that the adoption of multi-year tax cuts over the last
several years, but actual collections have underperformed.
Continued economic weakness has been creating stress on the
delayed state budget now under consideration, and the state's
reserves have been drawn down, reducing flexibility to address
additional future unanticipated adverse events.
The outlook for the state of North Carolina's general
obligation bonds is negative. A weakening economy, reduced
reserves and fund balances, and a slow response to restoring
structural budget balance have established negative trends,
which are now reflected in the rating. Efforts by state
elected officials to restore budget balance and fiscal
flexibility are currently under consideration. Moody's will
update its analysis after the budget is finalized.
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