The heated rhetoric about who’s to blame for the state budget stalemate has spilled over into the bond markets.
Moody’s Investors Service cited in a weekly public finance credit outlook report Nov. 6 that “North Carolina’s failure to pass a budget is credit negative, though stopgap funding allays adverse effects.”
North Carolina is one of just 12 states that have a top “AAA” bond rating from Fitch Ratings, Moody’s and Standard & Poor’s that affect the state’s general obligation bonds.
An “AAA” rating is defined by Investopedia as an “exceptional degree of creditworthiness, because the issue can easily meet its financial commitments.”
Moody’s was careful not to place blame on the budget stalemate in its analysis, though analyst Pisei Chea called it a sign of “governance weakness.”
The report was released a week after the Republican-controlled state legislature temporarily adjourned Oct. 31 without a state budget in place and no Senate attempt yet to override the June 28 veto by Democratic Gov. Roy Cooper. The next expected opportunity for a veto override vote in the session slated to begin Jan. 14.
The state Treasurer’s office said the “AAA” bond rating reflects “the state’s strong economy, growing reserves and conservative fiscal management.”
“Having these ‘AAA’ ratings ensures that we can borrow money at the lowest possible rates, which results in the state having more buying power,” Folwell said.
Chea wrote that “although the state ended fiscal 2019 with a budgetary surplus of nearly $900 million, the lack of agreement on budget priorities amid a time of economic expansion and healthy revenue growth does not augur well for budgeting and strong governance during times of economic and revenue stagnation or declines.”
Chea noted the dispute between Republican legislative leaders and Cooper on spending priorities, “notably Medicaid expansion and teacher pay.”
The legislature has passed mini-budget bills, some with bipartisan support and some along party lines,
Senate leader Phil Berger, R-Rockingham, said in a statement on Oct. 31 that through the minibudget process, the legislature has “passed funding that totals 98.5% of the original $24 billion (budget) it passed in June.”
However, Cooper has vetoed several mini-budget bills that include affecting public school teachers’ raises, corporate franchise tax-rate cut, state information technology budget and start-up funding for the state’s Medicaid managed-care transition initiative.
The ability for North Carolina to function with the previous year’s budget appropriations came as a response to the state budget for 2014-15 not being signed into law until Sept. 18, 2015, even though then-Republican Gov. Pat McCrory did not veto the bill.
Moody’s spokesman David Jacobson said Monday that Chea has not updated analysis to reflect Cooper’s vetoing of the teacher pay-raise and corporate franchise tax-rate cut bills.
Senate Majority leader Harry Brown, R-Onslow, cited the Moody’s report in a statement released Friday in which he said Cooper’s vetoes have “put our state’s AAA credit rating in jeopardy.”
“We knew from the beginning that the governor’s Medicaid ultimatum would negatively impact the state and now our worries have come to fruition. Thanks to the foresight of Republicans, we’ve avoided a credit downgrade.
“While Gov. Cooper continues to play games with teacher salaries, the Republican-led General Assembly is working to ensure the state of North Carolina remains on a strong financial footing.”
Cooper said in a statement Friday that the proposed 3.9% raise in the state budget and that mini budget bills “are not good enough for the people who work hard to prepare students for a bright future, as they are far less than the raises approved for other state employees.”
Dory MacMillan, Cooper's press secretary, said Monday: “Republicans haven’t moved one inch to negotiate with Gov. Cooper since passing their corporate tax-break budget in June as veto override has been their only option."
“This warning adds to the reasons why legislators should negotiate a common ground compromise with the governor as soon as possible with teacher pay being first on the agenda this week.”
Although state agency funding is largely insulated during the current impasse, the delay “could begin to hurt local governments and other downstream entities through an interruption in state aid,” Chea said.
“Counties with new state funds included in the 2019-21 (state budget) may need to delay the start of intended capital projects. Local boards of education that heavily depend on the state for operating funds face the most limitations.
“Increases in student populations and associated staffing requirements have the potential to cause some disruption, and some local boards of education may ask counties for additional funds.”
Chea cited “cases of interrupting implementation of state policy,” foremost the delay in rolling out the Medicaid managed-care initiative from November in the Triad and Triangle to a statewide launch planned for Feb. 1.
A bipartisan group of legislators have told state Health Secretary Dr. Mandy Cohen it may prudent to delay the roll-out again until at least July 1, 2020.
On Tuesday, the NC Association of Health Plan urged Cooper and Republican legislative leaders to work this week on legislation that fully funds Medicaid transformation "so that the state’s taxpayers, and 1.6 million North Carolinians that depend on Medicaid, can begin experiencing the benefits of a modernized Medicaid program early next year."
Chea also expressed concern with cash flow issues within the state Transportation Department, partly related to disaster relief efforts and partly the requirement that the department must pay compensation to landowners for reserving their land for future roads through the controversial Map Act without paying for the land at that time.
House Bill 967, which has cleared one committee, would transfer $360 million from the state’s general fund to help cover the settlements, as well as another $300 million loan from the state’s savings reserve to help with projects delayed by Hurricane Dorian.
Chea noted that the $360 million transfer “would equal about 1.5% of general revenue.”