Virginia’s ‘stable’ credit outlook

If we needed another reminder of how closely Virginia’s fiscal fortunes are tied to those of the federal government, a major Wall Street ratings agency provided it earlier this month.

Moody’s Investors Service affirmed Virginia’s Aaa bond rating July 19 and upgraded the state’s credit outlook to “stable,” replacing the “negative” forecast Moody’s assigned nearly two years ago because of Virginia’s reliance on federal spending. Virginia’s upgrade came one day after Moody’s adjusted the forecast on the U.S. government’s rating from “negative” to “stable.”

Moody’s noted that federal budget deficits have been declining at a greater rate than anticipated and that the economy has “demonstrated a degree of resilience to major reductions in the growth of government spending.” The federal government’s debt-to-GDP ratio through 2018 also will decline at a steeper rate than Moody’s expected when it assigned a negative outlook to the nation’s credit rating, the agency said.

That’s good news for Virginia, which has taken its own steps to shore up its standing with the ratings agencies. Moody’s, for instance, has highlighted the efforts of Gov. Bob McDonnell and the General Assembly to reform the Virginia Retirement System and reduce unfunded liabilities in the state and local employee pension plans, calling the reforms “credit positive.”

But Virginia still faces economic uncertainty because of across-the-board spending cuts imposed under the federal budget sequester. Virginia Sen. Mark Warner last week presided over a Senate Budget Committee hearing that highlighted the impact sequestration is having on small defense contractors. The CEO of a Virginia Beach consulting group told the committee that sequestration has led to inefficiencies and delays and forced him to idle one-third of his employees for weeks and months at a time. Warner said the sequester is hurting small businesses “from Northern Virginia to Norfolk.”

Warner warned that the waste and inefficiency will continue until Congress comes to “a broad, bipartisan agreement that includes both tax and entitlement reforms, as well as smarter spending cuts.” How might that affect Virginia’s bond rating? Moody’s warned earlier that future federal budget and deficit actions “could affect the credit quality of specific issuers” independent of the nation’s bond rating or credit outlook.

For the near term, Virginia’s blue-chip credit rating is stable. Long-term security depends as much on actions taken in Washington as decisions made in Richmond.

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