Wall Street Watches Budget Debate

By John Milne on Tuesday, July 1, 2003.

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"Bond rating" is a phrase not as well known as "broad-base tax." Nevertheless, "bond rating" has a venerable history in New Hampshire politics.

So it's no surprise that the state's bond rating made a dramatic appearance in this week's debate over the state budget.

NHPR political correspondent John Milne looks at the issue and finds that so far, the bond rating debate may be only a melodrama.

Monday morning in Representatives Hall, and the House is debating whether to override Governor Craig Benson's veto of the $2.7 billion dollar state budget.

Deputy Speaker Mike Whalley, supporting the override in opposition to the governor, declares:

"If we do not pass a budget today, our bond rating will be downgraded tomorrow."

As the debate progressed, Nashua Republican Henry McElroy, a freshman who backed the governor, went to the floor with a question for the leaders:

"Why do we keep hearing that our bond rating is going to drop? The treasurer said there are several factors that go into this, and there's no way our bond rating is going to drop by tomorrow, if at all."

McElroy was on the winning side in the debate. The governor's veto was sustained and so far the bond rating did not decline. It remains at double-A plus or double-A-2, depending on which Wall Street agency is issuing the rating. That's a strong rating, about average, not the Triple-A top.

The bond rating has always won high ratings in New Hampshire politics. While the state had a triple-A rating in the late 1970s, Democrat Hugh Gallen used it to defend his fiscal policies against conservatives who called him a big spender.

When the rating dropped to its present level in the early 1980s, Republican John Sununu turned that into a successful effort to unseat Gallen.

What's the real answer? Does failing to pass a budget affect the state's bond rating? Nicole Johnson is a senior vice president of Moody's Investors Service. She analyzes New Hampshire's finances for Wall Street.

"In and of itself, it's not something that would lead us to think about a rating change. There are a lot of states that are late on the budget, so generally speaking, one thing does not lead to a rating change. We look for trends over time. So while it's a late budget, certainly that indicates there's disagreement over how to arrive at structural balance, in and of itself, it wouldn't lead us to change a rating."

Of all analogies, the credit rating question fits well Governor Benson's familiar analogy to a family sitting around the kitchen table.

If a breadwinner loses her job at the same time she needs to buy a car, the finance company may charge a higher interest rate. That's because the risk is higher that the borrower won't be able to pay back the loan.

On the state level, big projects - a highway or a university dormitory - are financed through bonds. The state borrows the money and repays it with interest. That interest rate, and the project's cost, depends on how Wall Street views the New Hampshire budget.

If bond analysts fear the state can't pay its bond interest, the credit rating goes down. And the interest rate - and therefore the cost of building - goes up. Taxpayers pay that interest bill.

Moody's Nicole Johnson says analysts prefer states that do as Governor Benson proposed - set aside federal revenue-sharing money, instead of using it to pay current bills.

"We'll be looking at how some states plan to use that. Some states plan to use it to plug the budget shortfall for either this year or next year. It'll come in two parts. And other states, the very highly rated states, are contemplating putting the entire amount aside, in a reserve."

State Treasurer Mike Ablowich says that New Hampshire is one of a dozen states that started the fiscal year without a budget. But he adds that New Hampshire's history of reaching a compromise will work in the state's favor.

"Generally speaking, you know, our state has always risen to the occasion. Whether it was in the early 1990s, when we had some budget problems, or even in the mid 1990s, we had some pressures on our state budget. The Legislature's always come together with the governor and worked something out, and that's always worked in our favor."

In the longer term, Moody's Johnson says, the weak economy will put pressure on New Hampshire and many other states.

"We expect that budget pressures will continue for the next year or two, even with an economic recovery. A revenue recovery tends to lag the economic recovery, and forecasts of the economic recovery keep getting pushed out slightly. So that has yet to happen."

So as the Legislature debates how to go from continuing resolution to biennial budget law, they may choose extravagant statements to impress the voters. But the Wall Street analysts will be in the audience, too.

For NHPR News, I'm John Milne.