Virginia Secretary of Finance Aubrey Layne talks fiscal responsibility. Photo credit: Richmond Times-Dispatch
A downgrade of Virginia’s AAA credit rating could cost the Commonwealth between $33.9 million to $72.7 million in additional interest costs on its roughly $4.8 billion in state debt, says Secretary of Finance Aubrey Layne.
“If S&P downgrades and the other two follow, which they usually do, it could cost us millions,” Layne said, as reported by the Daily Press. “No governor, no secretary of finance, no legislator wants to be the guy on whose watch we lost the triple-A.”
Layne based his remarks on a preliminary assessment by the Public Resources Advisory Group, a New York-based consultancy hired by the state. The fragility of the state’s top bond rating has become an issue as the Governor Ralph Northam and the General Assembly continue to tangle with deep structural divisions over the fiscal 2019-20 biennial budget.
Thirty-four million dollars ain’t chump change. But in a two-year state budget of $114 billion, it’s a rounding error. OK, it’s a big rounding error, but it’s still a rounding error. Why do Virginians worry about the bond rating so much?
“Maintaining Virginia’s Triple-A bond rating is more than saving on the cost of borrowing, it is a recognition of being one of the best managed states in the country,” House Appropriations Chair Chris Jones, R-Suffolk, said, as quoted by the Richmond Times-Dispatch. Referring to the three bond-rating agencies that grade government debt, he added, “Virginia has been a Triple-triple A bond rated state for as long as bond rating agencies have conferred the rating, a distinction held only by a handful of states.”
The AAA bond rating is a red line that both Virginia Republicans and Democrats agree must not be breached — a rare example of bipartisan consensus. By itself, a downgrade to AA would not be the end of the world. AA is still investment grade, and Virginia still could issue bonds relatively cheaply. But allowing the rating to slip is like an alcoholic thinking, what the heck, it’s just one little drink, what could go wrong?
Over a couple of decades, AA degrades to A, and then to BBB. Next thing you know, you’re Illinois with billions in unpaid bills and a massive pension liability. And then you’re Puerto Rico, too fiscally feeble to respond effectively to a natural disaster.
At some point, whether ten years in the future or twenty, the federal government will face a fiscal crisis. The national debt exceeds $20 trillion, deficit spending soon will be adding another $1 trillion a year, interest rates on that debt are rising, and Washington, D.C., is neither interested in reforming the entitlement state nor in scaling back America’s global military commitments. Meanwhile, the Medicare Trust Fund for hospital expenses will run out in eleven years and the Social Security Trust Fund will run out in 16 years. And that’s the favorable scenario because it assumes no recessions between now and then.
When Washington plunges into crisis and chaos, we Virginians will be glad we have a federal form of government. And we’ll be glad the state has a AAA bond rating. While Illinois and New Jersey collapse into fiscal insolvency, the Commonwealth will be able to preserve essential functions of government. Virginia’s ability to maintain an orderly government and society is literally what’s at stake. That dystopian future is still a decade or two down the road, so prophesies of calamity seem like scare mongering. But absent a sea change in public and political sentiment that seems nowhere in evidence, that is where we’re heading, and that is why there can be no compromise on the AAA rating.
