Maryland on “negative outlook” as agencies reaffirm highest credit rating

The Maryland State House. File photo by Bryan P. Sears.

Maryland has retained its coveted AAA bond rating, even as one major agency said it had enough concerns to issue a warning about the state’s fiscal stability.

All three major credit rating agencies — Fitch, Moody’s, and S&P Global Ratings — reaffirmed the highest credit rating for the state this week. Moody’s, however, downgraded the state’s outlook from stable to “negative,” citing concerns about looming structural deficits driven by programs including the Blueprint for Maryland’s Future education reforms.

The updated ratings come ahead of a $1.2 billion state bond sale scheduled for Wednesday.

“The negative outlook incorporates difficulties Maryland will face to achieve balanced financial operations in coming years without sacrificing service delivery goals or adding to the weight of the state government’s burden on individual and corporate taxpayers,” Moody’s said in its report.

This is the first time since 2011 that Moody’s has issued a negative outlook for Maryland, according to the Maryland State Treasurer’s office.

“After hosting a successful briefing with all three ratings agencies for the first time in more than a decade, Maryland has once again received a AAA bond rating,” Treasurer Dereck Davis (D) said in a statement. “Looking ahead, we are confident that the General Assembly and administration will successfully navigate any challenges just as we have done in the past.”

Officials who track bond ratings and sales said privately that Moody’s can be more sensitive to fiscal concerns than Fitch and Standard & Poor’s.

“The outlook revision was driven by expected structural imbalances and planned depletion of General Fund surplus and budgetary reserves by about 60% from fiscal 2023 through fiscal 2025, which threatens to undermine performance relative to peers,” the rating agency added in its report.

Last month, state officials including Davis and Gov. Wes Moore (D) hosted a breakfast in Annapolis for all three bond rating agencies. It was the first time in more than a decade that the agencies came to Maryland to meet with state leaders.

All three agencies, in their individual reports, praised Maryland’s fiscal management. All three also raised concerns about issues including funding the state employee pension system and health care costs.

“I’m glad that we’ve been reaffirmed for a AAA rating. Whatever concerns there may be, my belief is that we need to continue to maintain a balanced approach in terms of revenues and services,” Senate Budget and Taxation Chair Guy Guzzone (D-Howard) said.

“We’re going to continue to build the community we believe in,” Guzzone said. “I know we can figure it out and we will figure it out. Whatever the circumstances, whatever the economy gives us, in a broad sense, we’ll use our tools and we’ll be thoughtful, and we’ll come up with, I believe, good solutions.”

S&P Global Ratings, in its report, noted some concerns about deficits and costly programs. Those concerns warranted the state being graded nearly in the middle of its rating system — a grade that would typically equate to a credit rating just below AAA. But the agency gave the state the benefit of the doubt citing its history of fiscal management.

“The stable outlook reflects our opinion of the state’s ability to proactively manage economic and budgetary risks that arise, and maintain a structural balance,” according to the S&P analysis.

Moody’s did not use the state’s history as mitigation in downgrading the state’s stability outlook.

“They are paying attention to what’s going on in the Maryland General Assembly. They’re right on target,” said Senate Minority Leader Stephen S. Hershey Jr. (R-Upper Shore).

“We have concerns about education spending in the out years, which is driving the structural deficit,” Hershey said.  “Either we have to find a way to scale back the Blueprint, or as we’ve been saying since that was passed and then every single year since then, the state’s going to be forced to raise taxes in order to pay for it.”

The analysis from the rating agencies — especially Moody’s — will likely do little to temper calls for raising taxes.

Legislative budget analysts project that by next year, the state’s projected structural budget deficit — the gap between projected expenses and expected revenues – will grow to $1 billion. In fiscal 2027, the last year of Moore’s term, it grows to $1.3 billion. A year later, it more than doubles to $3 billion — about 12% of the general fund revenues projected for that year.

The deficits are driven by costs associated with the Blueprint for Maryland’s Future education plan.

Moore and Senate leaders including Guzzone and Senate President Bill Ferguson (D-Baltimore City) expressed reluctance this year to raise taxes even as fiscal leaders in the House pushed for their $1.2 billion package.

In the end, the House and Senate agreed to a package, that includes increased vehicle registration fees, that is estimated to pump more than $2.1 billion over the next five years into road and transit projects, education and Shock Trauma and emergency services. There were no broad-based tax increases in the compromise plan.

Carter Elliott, a Moore spokesperson, said the governor “remains confident” in the state’s fiscal position following the three new credit ratings that cited “the state’s significant credit strengths.”

“These include our state’s strong history of proactive financial management and governance, stable economy with high personal income levels, prudent debt management, and strong reserves and liquidity,” Elliott said in a statement.

Elliott said the administration has been focused on budget issues since before taking office and “worked with discipline and restraint to propose a budget that is balanced on a cash basis, helps close the structural gaps, and preserves significant reserves but also drives economic growth and long-term fiscal sustainability for Maryland.” The statement added that the governor will work with lawmakers on “long-term structural solutions” that balance revenues with priorities.

Maryland is one of just 14 states to hold the highest credit rating from all three major credit agencies. Governors and fiscal leaders often trumpet the ratings. They are also zealous in guarding against potential downgrades.

“We take everything that the bond rating agencies say as serious,” Guzzone said. “We consider all those things as we continue to move forward.”

The status means the state can borrow money through bonds at lower interest rates. Those lower rates translate into savings for taxpayers as the bonds are repaid over 15 years.

The state is scheduled to offer $1 billion in tax-exempt bonds and $200 million in taxable bonds during the June 5 Board of Public Works meeting.

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