Maine’s bond rating: a telling indicator of the soundness of government finance and the state’s economy.

It’s as much a part of our image as the state seal.

May, the college graduation month, is also when the major bond credit rating agencies decide how Maine will graduate into June, our state’s bond selling month. Unlike college graduates, however, there’s never doubt whether we will graduate with honors. All states do.

States, as Governing magazine once said, are “the crme de la crme” of bond issuers. Thus, the question is whether our diplomas will be inscribed with either high, or highest, honors.

But according to Moody’s, the only major rating service to have graded Maine throughout the last 35 years, the answer is neither. While another of the big rating services, Standard and Poor’s, gave Maine an improved student award last week – reversing one of the successive downgrades it meted out in 2004 and 2005 – Maine, according to Moody’s, is neither a high nor highest honor student.

In its bond rating jargon, Maine is “Aa3,” the same rating the state’s had since its 2005 downgrade. Thirty-two states have higher Moody’s ratings. Only two states, California and Louisiana, are below us. Even in the more upbeat S & P scoring, only nine states are doing worse.

This plight has not always been our lot. Until April 1974, Maine had the highest honors. Moody’s was rating us “Aaa,” an accolade we shared with only 15 other states.

Since losing the coveted “Triple A” rating 33 years ago, our class standings have declined. The last hit was two years ago, when Maine joined Katrina-beleaguered Louisiana as the only states downgraded by all three major credit rating agencies.

Though a change in rating triggers only a small change in interest costs, it sends an important symbolic message to the world. That’s why six of Maine’s top fiscal officers spent nearly three days in New York last month presenting our case to raters. They included State Treasurer David Lemoine, and the economic analyst for Maine Revenue Services, Dr. Michael Allen.

Allen was the most experienced bond rating presenter in the group. Last month was his seventh New York sojourn to see the rating analysts. He was also the only one with access to confidential income and sales tax returns, and thus equipped with firsthand knowledge of revenue trends.

After all, it’s the ability to raise money that backs the ability to pay the bonds.

Even though Maine’s bond rating for the past two years was lower than it’s ever been, Allen felt this year’s trip was not as dramatic as some of his previous Gotham outings. For him, a more pressing occasion was 2005, when the impending closure of the Kittery shipyard and Brunswick air station led the agenda. Saving Kittery and keeping the lottery only resulted in an upturn from only one of the three major rating services, however.

Anxiety this year was alleviated by the absence of citizen initiatives. The citizen initiative, which Maine shares with only two other eastern states, Massachusetts and Florida, remains Banquo’s ghost at the bond rater’s dinner table.

Moreover, uncertainty still attends Maine’s revenue picture, particularly the income tax, which Allen says is hardest to predict. The increased use of bonus and stock options by business have accentuated its chameleon-like character.

Another hard to figure feature of the income tax is the fluctuation in capital gains, an element tied more to Wall Street, than our state’s Main Streets. In 2001, for example, capital gains revenues fell 54 percent from the previous year, but shot up over 43 percent from 2003 to 2004.

Though soak the rich may be the tax’s vaunted hallmark, consistency is not.

Sales tax revenue also has its anxious moments; one of them is now. Auto and truck sales, which account for almost a quarter of sales tax revenues, have been “extremely slow” since late 2005, according to Allen. The onset last spring of a construction slump has flattened revenues from sales of building supplies.

General merchandise retail sales are also off. Allen attributes this decline, like the transportation slump, to the increased burden of higher energy costs on low and middle income families.

These, and other, issues still leaves Maine several Moody’s notches below where the state was in spring 1974. To discover how Maine can regain its status, should it take a few pages from the books of the nine states Moody’s now gives the triple “A” status it once held?

The newest member of this exclusive block is Vermont, the only state that outranks Maine in tax burden, and imposes a statewide property tax. Perhaps this is not the kind of company we should aspire to join.

Six of the eight other states are more benignly taxed Atlantic coast states. Unlike Vermont, they also win highest marks from at least one of the other two major raters.

Maine might take a closer look at Delaware, Maryland, Virginia, Georgia, North and South Carolina – all less than a day’s drive away. Only one, Utah – with the youngest and most productive work force in the nation – is a western state. What these states all seem to have in common are strong economic bases and stable tax systems.

In attaining these goals, Maine will find the answer to restoring its summa cum laude bond rating.

Paul H. Mills is a Farmington attorney well known for his analyses and historical understanding of Maine’s political scene. E-mail him at: [email protected].
The citizen initiative, which Maine shares with only Massachusetts and Florida, remains Banquo’s ghost at the bond rater’s dinner table.