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State finances under scrutiny

New York bond-rating agency places Virginia on a watch list because of the state's lingering fiscal struggles

By CHELYEN DAVIS

Date published: 9/5/2003

Virginia's bond rating at risk

RICHMOND--The bond rating agency Moody's has placed Virginia on its watch list, a possible precursor to downgrading the state's AAA bond rating.

Moody's Investors Services said yesterday that Virginia "has experienced a significant deterioration of its balance sheet over the past two years." Factors such as the economic recession--which severely affected Northern Virginia's high-tech industries--the continuing weak economy, and the car-tax cut have contributed to the difficult fiscal situation.

New York City-based Moody's noted in a news release yesterday that in trying to balance the budget, Virginia leaders have relied on one-time fixes, such as nearly draining the Revenue Stabilization (or "rainy day") Fund.

Moody's said that while Virginia has taken "aggressive actions" to balance its budget, "slow economic and fiscal recovery coupled with increasing spending requirements for Medicaid and other programs will likely compete with the need to replenish reserves and restore structural balance in the near term."

If Virginia's rating is downgraded, it will cost the state more to borrow money for capital projects such as college buildings, transportation projects and parks.

Moody's decision came as no surprise to state financial leaders. Secretary of Finance John Bennett said in a statement that the administration has been in "regular contact" with Moody's analysts and discussed the state's finances with them last week.

Sen. John Chichester, R-Stafford County, chairman of the Senate Finance Committee, said two weeks ago that he feared Moody's and other bond agencies would downgrade Virginia's bond ratings.

"I have sensed for some time that we were falling short of what I consider to be a state deserving of a AAA-bond rating," Chichester said yesterday. "I don't think we're there yet, and I think we're being given ample time for a plan of remediation."

Prior to yesterday's decision, Virginia had a AAA bond rating with a "negative outlook" from Moody's.

Virginia is one of just eight states given a AAA bond rating by Moody's. Virginia also has a AAA rating from the two other rating agencies, Fitch and Standard & Poor's. The AAA rating is the highest rating possible and allows the state to borrow money on more favorable terms than states with lower ratings.

Being put on the watch list does not mean Virginia's bond rating is or will be downgraded, but it's a step in that direction.

According to the release, Moody's will continue to review the state's finances "with a particular focus on the state's plans to restore structural budget balance in the next biennium."

Chichester said restoring that structural balance will be his top priority as Senate Finance chairman.

Bennett said he is "confident that we have the ability to take the actions needed to maintain the triple-A rating from Moody's, and we certainly intend to do everything we can to do so."

To reach CHELYEN DAVIS: 804/782-9362 cdavis@freelancestar.com

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Date published: 9/5/2003