AUGUSTA (AP) – Moody’s Investors Service said Friday it had placed the state of Maine’s general obligation bond rating, currently rated Aa2 with a stable outlook, on its Watchlist for a possible downgrading.

Moody’s attributed its action to “persistent weakness in Maine’s financial position despite revenue and job recovery following the recession.”

Moody’s said that in weighing a downgrade it will “review Maine’s current and projected financial position with a particular focus on the state’s plans to replenish depleted reserves and the likelihood of making progress to a level sufficient to provide a buffer for another downturn.”

Addressing Gov. John Baldacci’s pending budget proposal for the 2006-2007 biennium, Moody’s noted that the package was designed in the face of a potential $730 million shortfall that, while down from a structural gap measured two years ago, “is still sizable at roughly 13 percent of the operating budget.”

Moody’s also noted that the budget package includes a proposal to securitize up to $40 million per year of state lottery receipts and said “this deficit financing would result in a budget shortfall in the subsequent biennium (2008-2009) both in terms of lost property tax revenues and reduced lottery revenues flowing to the General Fund.”

Moody’s said its Watchlist review “will focus on the effect that the adopted budget has on structural budget balance, the impact on the state cash balances and need for external cash flow borrowing, and the strength of the state’s continued economic and revenue recovery.”

Commissioner Rebecca Wyke of the Maine Department of Administrative and Financial Services said other budget provisions could make up for lower lottery revenue and that a suggestion that the state collects local property tax revenue was mistaken.

“It’s really liquidity,” Wyke said in offering a summation of Wall Street concerns.

“They want to see the revenues rebuilt faster,” Wyke said, recalling that Maine’s rainy day fund was effectively emptied by the end of calendar year 2002.

Wyke pegged current reserves at nearly $50 million.

“We have not been able to recover” as quickly as Wall Street analysts would prefer, “but we are headed in the right direction.”

Asked about the political effect of the Moody’s action on the Baldacci administration’s budget plan, with its reliance on booking $250 million from the lottery revenue securitization, Wyke suggested the jury was still out but expressed confidence.

“It hasn’t had its full day yet,” she said. “People are reacting to it as if it’s in a vacuum and you can’t consider it that way.”

Speaking as the Legislature’s Appropriations Committee wrapped up a second of three full weeks of scheduled public hearings on the Baldacci budget package, Wyke added: “We think it’s the most appropriate path through the challenges we’re facing.”

Next week, the Appropriations Committee’s focus will be on social services cutbacks contained in Baldacci’s budget plan.

Wyke said alternatives to the governor’s package would likely have to entail further cuts or higher taxes.

AP-ES-02-04-05 1719EST

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