Bond-rating delusions

Originally published in the Frederick News-Post

OP-EDS

JULY 21, 2010 E-MAIL THIS PRINTER FRIENDLY

One of the first tenets of Alcoholics Anonymous is the need for addicts to recognize problem drinking. That allows them to stop and to begin the recovery process.

Would that Maryland officials have reached that point in recognizing the state's spending problem. Instead, they celebrate, like last week when discredited credit ratings agencies reaffirmed the state's AAA rating, the highest possible. This will allow Maryland to borrow money cheaply and delay hard budget choices by sinking further into debt.

Treasurer Nancy Kopp called the credit reaffirmations "significant" and a recognition of "good public fiscal management" even as the prior weekend the co-chairmen of President Barack Obama's debt and deficit commission called state debt "a cancer" and something they cannot tax or grow their way out of.

Gov. Martin O'Malley used the opportunity to once again compare Maryland to other states. "Since January, we've added 38,000 jobs to Maryland payrolls, a growth rate twice that of the rest of the nation. And Maryland's unemployment rate remains about 25 percent below the national average," he said.

To show the full extent of leadership's denial, legislators created a commission in the 2010 legislative session to study what should be done to address massive unfunded pension liability that will strangle the state's ability to pay for core services in coming years. Together with unfunded health care liabilities, the bill is over $30 billion. The group has yet to meet.

Here is why officials and legislators need to stop patting themselves on the back and spending money the state does not have:

n Credit ratings agencies are as credible as Bill Clinton is faithful. They accelerated the housing crisis by giving high ratings to mortgage-backed securities based on no documentation and fraudulent loans. As Michael Lewis pointed out in "The Big Short," they gave AAA ratings on bonds backed by migrant workers, housekeepers and others making less than $20,000 a year holding $750,000 mortgages.

Even Wall Street bankers didn't take them seriously. "Guys who can't get a job on Wall Street get a job at Moody's (Investors Service)" was one of many derogatory quotes Lewis mined from sources describing the quality of the people at the agencies. "Brain dead" was another description of agency employees.

n The state is in serious trouble. While the ratio of Maryland's $9.5 billion of outstanding bond debt to personal income falls within arbitrary "affordability" guidelines, it does not take into account the $30 billion in unfunded pension and health care liabilities and $40 billion in unfunded transportation projects. And don't forget the billions more in debt offered by hospitals, nonprofits and other groups through the state that taxpayers could be held liable for if any of those groups default. If taxpayers can bail out Rocky Gap Lodge & Golf Resort, they will be on the hook for other allegedly privately financed projects.

To fix the problem, legislators should fully fund state employee pensions and health care in next year's budget. They should also refuse to include as revenue potential federal dollars like the nearly $400 million expected for Medicaid this year that will likely not arrive. These changes would force state leaders to confront the truth, something they have been denying for decades.

Marta Mossburg is a senior fellow at the Maryland Public Policy Institute. Contact her at: mmossburg@mdpolicy.org

Bond-rating delusions

Originally published in the Frederick News-Post

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