Maryland and Virginia’s ability to borrow money could take a severe blow and cost taxpayers millions of dollars if talks to raise the U.S. debt limit fail in the next several weeks. Moody’s Investors Service announced Tuesday it may downgrade the bond ratings of five of the 15 states with coveted
Aaa ratings. Maryland, Virginia, South Carolina, New Mexico and Tennessee — states with high proportions of federal employees and contracts — are under review and likely would be downgraded if the U.S. government’s rating were downgraded to Aa1 or lower, the investment services firm said.
“If Maryland and Virginia’s debt rating was downgraded, their borrowing costs go up, making it more difficult for schools to be constructed, roads maintained and bridges to be monitored for safety,” said Anirban Basu, CEO of Sage Policy Group.
The singling-out angered state officials, who called the potential downgrade a source of great alarm and consternation.
“It is a pox on both parties, and both houses of Congress and the president that they can’t lead and get this deal done,” Virginia Gov. Bob McDonnell said.
The uncertainty over the federal government’s ability to meet its debt obligation is prompting Maryland to consider delaying scheduled bond sales in the coming week. The state has several sales totaling $718 million in bonds scheduled before the end of July, according to Bernadette T. Benik, the state’s chief deputy treasurer.
Benik said state Treasurer Nancy Kopp had been aware that Moody’s planned to review its rating again and that state
officials were consulting with financial advisers.
“If the feds do not resolve this issue, markets could be chaotic,” she said. “If there’s any problem in the markets then we’ll postpone [the sales]. But we haven’t made that decision yet.”
U.S. Treasury officials have set an Aug. 2 deadline for Congress to raise the debt ceiling or risk defaulting on its debt. Any change in states’ rating would be announced seven
to 10 days after any action taken against the U.S., Moody’s said.
The Virginia Department of the Treasury had $45.6 million in Virginia Public School Authority bonds scheduled to be sold Tuesday, but officials could not be reached to confirm the sale. The next scheduled sale is Aug. 3.
University of Baltimore economist Richard Clinch said if the debt ceiling is not raised, everyone is hurt. Federal dollars the states receive to help fund programs like Medicaid or public works projects would be slashed.
“If we’re dumb enough to do this, the repercussions will be huge,” Clinch said. “The least of our worries is Maryland going from triple-A to double-A.”
