State Could Lose AAA Bond Rating

Bond ratings determine how much money a state has to pay when it borrows money. The AAA rating, which is the highest possible, represents a low-risk investment.

If the state's bond rating drops, North Carolina could have to pay millions of dollars more in interest payments.

Ray Murphy, vice president of Moody's, the most influential of three services that determine bond rating, said the service placed North Carolina on "negative outlook" status in December because of the state's poor economic projections.

"A negative outlook doesn't necessarily indicate a near-term change (in the bond rating), but it does give an indication that there are certain stresses facing the state," Murphy said.

But he noted that Moody's is not necessarily considering downgrading the state. "We think (the state) will adequately address the problems and develop a plan for long-term structural balance."

He added that Moody's is considering implementing a "watchlist" classification that would establish a 60-90 day window before a potential downgrade.

Part of the reason North Carolina's rating might not be downgraded is because the state's governmental structure allows Gov. Mike Easley to bypass the state legislature when making some budgetary decisions.

"The governor does have the ability to make budgetary adjustments if there are problems, like a projected shortfall," he said. "Legislative debate wastes valuable time, as we see in other states."

Katherine Kirkman, director of public affairs for the N.C. Department of State Treasurer, said department officials remain in constant contact with rating agencies. "If anything would happen to jeopardize our rating, we would be in touch," Kirkman said.

She said North Carolina has preserved its rating in the past largely because of its strong cash reserves.

But Easley could raid the state's rainy day fund to pay off the $900 million shortfall the state faces so far this fiscal year.

"North Carolina has done a good job in the past of having a rainy day fund," Kirkman said. "We don't use one-time revenue sources to plug shortfalls."

UNC economics Professor Patrick Conway said he believes the rating services will be patient in their assessment.

"We have to worry about the bond rating if we don't deal with the deficit quickly and efficiently, to come to grips with it." he said. "We have to be forthright with raising taxes or cutting expenditures."

Conway noted the downgrade from a AAA to a AA-1 classification would result in a difference of about a half percent in the interest rate at which the state has to pay back bonds.

He also said UNC's financing would be impacted immediately by a downgrade in the state's bond rating because of the University's reliance on state funding.

Kirkman noted that faulty budgeting often lowers a bond rating. But she also said state leaders will do their best to maintain the AAA rating. "North Carolina is committed to repaying debts and being fiscally responsible," she said. "And that will ultimately save tax payers millions of dollars."

The State & National Editor can be reached at stntdesk@unc.edu.