By Paul Mills

Ben Franklin didn’t quite have it right. When he once observed that there are only two things inevitable in life, death and taxes, he should have added a third, government debt.

It’s a subject brought into focus just a few days back when a leading New York – as in that’s where the money is – firm marked down Maine’s credit rating a notch, the first dive in more than 10 years. It’s a subject that’s sent this barefoot columnist on a mission to find out just what’s going on. When our credit gets a lower grade on its report card, even a novice can conclude that it’s not such a great thing. I still wanted to know more, not just what it means for now, but what it is we’re doing wrong that brought it about in the first place.

What it means

First of all, it’s comforting to know that though our rating is now lower, it could be a lot worse. California’s, for example, until just last month was only two notches above junk bond status, and we’re still a bit higher on the totem pole from New York’s. We are slightly behind New Hampshire, and we’re at the same level as the home to Microsoft, Washington State.

What it means directly to us is that it now costs us more to rent, that is, to borrow or “hire” money. How much more? That’s a tough one because so many factors or variables are in the mix. For one thing, the sale of bonds by the state occurs only once a year and so just comparing the interest rate on the sale or “issuance” that occurred earlier this month with what happened a year ago when our rating was higher gives you only an apples to oranges comparison.

On top of that, there are about 60 different interest rates for this year’s Maine bonds. The interest rates vary because the length of time the state has to pay them back is different for each category. For some bonds, it’s only six months and the rate there is a mere 2 percent. For the longest “term” (time to pay back), which is now about nine years, the rate is about 5 percent.

Just how much more money will it cost in real dollars? In ballpark figures, state Treasurer Dale McCormick estimates that it’s somewhere around $l00,000. That translates out to an extremely small part of the actual increase in interest rates that Maine sustained earlier this month.

Though the average rate earlier this month of 3.72 percent was almost a full percentage above the rate of last year’s sales, 2.75 percent, McCormick attributes less than one-fiftieth of that increase to the new credit rating. The rest of the increase is due to a tighter interest rate environment.

Though direct or immediate financial impact of the rating drop is not great it still is a criticism by a prestigious institution of what Maine is doing and for that reason alone is worth exploring.

What we did wrong

First is the threat of fiscal upheaval posed by this year’s petition initiated tax referenda. The bond rating services foresaw the Maine Municipal Association referendum headed to victory and knew that the state might be confronted with a sooner than expected need to come up with an extra $260-million.

They are also concerned that the ensuing confusion might well turn into fiscal turmoil by impending consideration of this November’s vote on the Carol Palesky property tax referendum.

As Jamie Pitney, the Augusta attorney for the state’s leading underwriter, put it in an interview with this columnist, “Citizen initiated referenda are very much on the radar screen” of the investment rating services. If bond holders – those that buy our IOUs – could vote, they’d have voted no on Tuesday and will be hoping we vote that way in November.

The second thing Maine did wrong is that we as a people are not making as much money as we should be. In other words, the economic doldrums place our government at a disadvantage in collecting revenue. State Treasurer McCormick reminds us that on that score, Maine is by no means alone and that 80 percent of Maine’s economy is beholden to outside forces, and we have been part of a regional, and not just a state, downswing.

What else did Maine do wrong? In the last fiscal year, we reported a $20 million negative balance in the general fund. This one I had a bit of trouble understanding since Maine, like all but one of the other 49 states, is legally required to balance its budget. How can we be in the red if that’s the case?

The answer can best be understood by comparing our budget process to driving a car down the highway. In preparing the budget, we can only look out the front windshield and look ahead. We don’t know what lies around the corner. The rear view mirror look last year turned out not so well as predicted, in part due to the discovery of some $38 million in unaccounted for Medicaid funds.

That’s why, despite the balanced budget mandate, we can still wind up with a budget that didn’t cruise down the road the way our drivers expected.

Rest assured the state’s credit is still strong enough to summon up the money to make up for the shortfalls, but the negative balance in the general fund is still a reason why a credit rating guru might not approve of us as much as it did a while back.

The fact that credit raters may be more interested in the way our state budget trip turned out than in the road map we design could be a reason why the only state without a balanced budget requirement, Vermont, has a credit rating that doesn’t seem to suffer. Its credit rating is better than most of the other states, including our own.

Paul H. Mills is a Farmington attorney well known for his analyses and historical understanding of Maine’s political scene. He can be reached by e-mail at [email protected].