July 3, 2020
The state treasurer’s office reports that Washington’s credit still has a high rating going into the new fiscal year. Washington’s general obligation bond debt continues to be rated Aaa by Moody’s and AA+ by S&P and Fitch.
In making the ratings, the three agencies highlighted Washington’s strong fiscal governance, including the state’s revenue forecasting process, four-year balanced budget requirement, and healthy rainy day fund.
For example, “Fitch believes the state’s very strong financial resilience entering this period of uncertainty, as evidenced by its reserves and conservative budgeting, enhances its ability to manage through expected revenue losses or additional expenditures due to the coronavirus.” (More on our budget sustainability practices here.)
In our report on lessons from Great Recession budgeting, we argued that the state should maintain the four-year balanced budget requirement. As S&P notes, “We expect the state’s strong fiscal management will persist in the current recession.”
Fitch points out that Washington’s expenditure flexibility “is somewhat more restricted than is true for most states due to court mandates on education funding.” Funding for basic education now makes up 49 percent of the budget. But, as we wrote in a recent brief, it is not impossible to cut even that spending.
According to Fitch, a ratings downgrade could occur if the state does not “effectively address the fiscal challenges triggered by the expected short but severe economic contraction, such as not making needed budget adjustments to the enacted omnibus operating budget, which leaves the state less fiscally resilient at the end of the recovery period.”
Similarly, S&P writes, “We could lower the rating if lawmakers delayed taking corrective action in addressing revenue shortfalls or relied extensively on one-time solutions to remediate budget gaps. We could also lower the rating if Washington’s reserve balances were to decline precipitously and the state lacked sufficient plans for timely replenishment.”
(Although there has been much talk of a special session at some point this summer to address the revenue shortfall, Joseph O’Sullivan of the Seattle Times reported yesterday that House Majority Leader Pat Sullivan said that will not happen. Austin Jenkins of Northwest News Network quoted Gov. Inslee: “we have already tightened our belts and are in a position to be able to last until January.”)
S&P also noted Washington’s “high cost of housing” and “exposure to international trade activity” as negative points. Finally, Moody’s notes that for Washington, generally, “Frequent voter initiative activity adds budget challenges.” As Austin Jenkins writes, there will not be an initiative on the ballot this year—the first presidential election year since 1928 without one.
Washington’s high credit ratings mean that it is less expensive for the state to borrow for capital projects. But as I’ve written, it would not be a good idea to borrow to balance the operating budget. The Center on Budget and Policy Priorities agrees:
States may wish to borrow in the short term to manage cash flow or to buy time in hopes of additional direct federal aid or faster-than-expected economic growth. But without substantial, additional direct aid, this likely would only delay damaging layoffs and spending cuts, not avert them. . . .
Even for a state not constrained by its constitution, it would be risky to borrow for long periods to cover budget gaps, which could set the state up for even deeper financial problems down the road. No one knows how long the recovery from this recession will last or when a natural disaster might strike; states could find themselves in new fiscal straits before paying off the debt incurred during this recession.
Finally, the New York Fed gives some background:
Historically, state and local governments respond to recessions by drawing down rainy day reserves, cutting expenses, and temporarily raising revenues, including taxes, rather than borrowing. While collectively these steps are contractionary from a macroeconomic perspective, individually they reflect sound fiscal policies and are one of the principal reasons for the very high credit quality of the municipal sector.
Recognizing these fiscal constraints, the federal government often responds with significant fiscal support for state and local governments, as Congress has previously done during the current crisis. Most state and local governments are currently developing their 2021 budgets with the expectation of additional federal fiscal support that would limit the extent of budgetary retrenchment and deficit borrowing.
(Indeed, one reason given by Rep. Sullivan for not having a special session this summer is to wait and see if Congress provides more funding for state and local governments.)Categories: Budget , Economy.