Measuring Stick or Punishment Switch

State politicians have for awhile now been attempting to leverage state and local credit ratings, as done by the major governmental credit rating agencies, Standard & Poor, Moody’s, and Fitch, into scorecards for political advantage.  The representation is that if a state’s credit rating goes from, for example, AA to AA-, that some type of cataclysmic event has occurred, or if it goes from AA- to AA that full proof has been delivered that the Governor or political party in control of the Legislature, has been doing an incredibly great job. Both positions are, of course, nonsense.

There is real harm here though, because those same politicians have now started to use small reduced credit ratings, or the potential of a reduction in a credit rating as an excuse for not doing what needs to be done.  It has become like the waving of the bloody shirt after the Civil War, designed to move the electorate away from talking about the substance of a particular issue to railing over a tangentially related or completely unrelated issue. Rather than talk about the merits of borrowing $100M to build a high speed internet spine from Madawaska to PI and on to Bangor and Kittery (which in fact in this time of low interest rates we should do) we talk about the impact or harm on the State’s credit rating.

The reduction of a State’s credit rating by even one step, as cited in the previous example, has little or no impact on the interest rate the State will obtain when borrowing money.  More importantly, even a two or three stop drop in a States credit rating will have so little of an impact on borrowing costs that it will likely be made up for in the short and long term economic benefits funding sound infrastructure projects generates.  Even if that complete offset does not occur the general public benefit from safe bridges, good roads, safe drinking water and so many other infrastructure projects underpin the state we want to live in and should not be stopped by some third party’s abstract analysis of selected information.

There are only two times when we should worry about a state’s credit rating.  The first is if over a two or three year period the credit rating is regularly reduced.  If a state’s credit rating goes from AA to A- or BBB over a two or three year period then something is wrong. The second is if the state’s credit rating goes into the so-called junk bond category.  Either of these events should generate a close look at how the people in charge are running the store.

Credit ratings are not a measure of successful governance nor should they be used as a political switch to garner some kind of partisan advantage.  Credit ratings are a highly mechanized and formulaic tool to measure selected elements of economic activity and governmental expenditure.  They should not be used to stop the undertaking of critical activities to meet public need and safety. If an important project needs to be built and we cannot pay for it out of our of cash flow we should borrow the money after we have looked first at the value of the project, then at the interest rate available in the bond market and our willingness over time to make the payments on our loan.  Our credit rating, unless we push ourselves into junk status, is not even on the list.  Don’t be diverted.

 

 

Robert Lenna

About Robert Lenna

My professional career has been involved in bringing to Maine the financial capital to build our infrastructure of housing, schools, roads, hospitals, colleges, water and sewer districts. As Executive Director of four independent state authorities charged with putting together public financing for hundreds of infrastructure projects I was responsible for bringing billions of dollar into the Maine economy.