Rebel With a Cause

Paul Goldman


The Billion-Dollar Scare Tactic

Gov. Warner and his allies defend their tax plan by saying "Moodys Made Me Do It." Are Wall Street bond brokers running Virginia now? No, a billion times no. The governor knows the truth.


Don't be surprised if you soon see a white flag waving from atop the Richmond memorial to Virginia's Revolutionary War heroes. Gov. Mark R. Warner, many in the General Assembly leadership, and their Virginia Chamber of Commerce allies are on the verge of doing something no previous generation of Virginians would have tolerated: Using a statement by the Moody's bond-rating agency as a political threat to force a billion-dollar general tax increase upon the working families of the Commonwealth.


So much for "No Taxation Without Representation." 


Moody's, as you undoubtedly know, has put Virginia on "credit watch" for a possible downgrade of its AAA bond rating. Those demanding the biggest general tax increase in state history quickly turned Moody's into the Freddie Kruger of municipal finance. The scare tactics have overcome people who surely should have known better.


For example, House Finance Chairman Harry Parrish, R-Manassas, a respected legislative veteran who introduced the governor's tax plan in the House, said the following, according to the Potomac News:


"Manassas Delegate Harry J. Parrish, R-50th, said without the AAA bond rating, Virginia would pay $1 billion more in debt payments per year."


Del. Parrish surely knows Moody's never said anything of the sort because it's untrue. The governor knows this kind of thing is a pure, unadulterated scare tactic, being spread by the High Tax high-pressure campaign.


At the same time, Del. Parrish has revealed more than he realized. To understand the significance, it helps to recall the background.


First, last summer Gov. Warner had a private chat with Moody's. This was normal. He said no quid-pro-quo was exchanged on the tax issue.


Then, in conjunction with lobbyists and other political insiders -- the general public was kept in the dark during this whole process -- the Warner administration developed and then sprung on the state a plan for a billion general tax increase which it said was necessary to "protect the state's triple-A rating."


Third, Warner and others crisscrossed the state, leaving the impression that Moody's wanted an extra billion in the next state budget -- or else it would downgrade our bond ratings. Indeed, when asked the other day about Moody's, the governor said he couldn't guarantee anything, but he thought the bond agency was looking for - you guessed it - the precise amount of money generated by his billion-dollar general tax increase. Convenient, isn't it?


Fourth, we finally have Del. Parrish saying publicly what he and others have been hearing privately: the billion-dollar scare tactic.


In effect, Virginians are repeatedly being told they will have to pay a billion dollars one way or another: either to bondholders or to the tax man.


So, the high-tax lobby is spinning this Moody's smokescreen. If we pay the billion to the bondholders, we don't get any benefit in terms of better services. It only makes sense to raise general taxes a billion dollars and keep the money in Virginia.


Gov. Warner is fond of saying things must pass the "smell test."


Well, something about the "Moody's Made Me Do It" threat smelled fishy to me.


First, this "Moody's Bad, Me Good" excuse makes Warner out to be a jellyfish. He cannot possibly want convey this image of himself. Yet he is willing to risk it. Why, I wondered?


Second, it opens up an historic political sore point in every Southern state, the sensitivity to any claim that "outsiders" such as Northern bankers can tell us what to do. In my estimation, an ambitious politician like the governor would be leery at allowing anyone to suggest he backed Wall Street, USA over Main Street, VA, in a tax fight.


Why would Warner risk coming across as more worried about bean counters from the Big Apple than the voters in Big Stone Gap?


So, I have reached the self-evident conclusions: Warner and the high-tax lobby are cynically using Moody's. This isn't the case of Gov. Jellyfish at all.


The "Moody's Made Me Do It" routine was adopted because the polls taken by the high-tax lobby to figure out how to sell the tax plan showed that the threat of a Moody's downgrade was the best political weapon. So the political consultants laid down the law: The scare tactic had to be used. 


For example, Gov. Warner regularly cites North Carolina as a state that has demonstrated a superior commitment in recent years for K-12 and higher education. But North Carolina recently suffered the indignity of a bond downgrading to AA. How, then, according to the high-tax lobby's logic, can the Tarheels be better off?


The bogus claim that a downgrade would cost Virginia a billion dollars is further evidence of the phony nature of the AAA threat politics. As of June 30, 2003, Virginia had $17.8 billion in total debt; $5.3 billion was tax-supported debt. Any downgrade would apply only to new debt issues, not affecting interest payments on existing debt.


Assume Virginia issues $2 billion in new debt next year, far more than the governor is proposing in his budget if I read it correctly. Bond experts tell me a downgrade will raise the state's interest costs 1/10 of one percent or so. This would equate to $2 million a year in extra interest costs. Even if you assumed this expert opinion was off by a factor of 300 percent, Do the math: The figure is not even $10 million, much less $1 billion.


Mr. Parrish may be presumed to be talking about state and local government debt. But unless he thinks Virginia's governmental entities are going to issue enough new debt this coming year to pay off a huge chunk of George Bush's federal deficit, this billion-dollar scare tactic is shameless, and the governor knows it.


The media has never pressed the Warner Administration to discuss the practical aspects of a downgrade in pure dollars and cents. Surely someone in the state's editorial boards is curious to know why it's necessary to impose such a huge general tax increase on Virginia's working people in order to allegedly satisfy a handful of New York bean counters.


When faced with a Moody's evil eye, every other Virginia governor and every other General Assembly has backed the taxpayers of the Commonwealth -- not the bankers in the Big Apple. Virginia's elected leaders have never buckled to King George III type-pressure, never raised a billion dollars in general taxes under some "do it or else" AAA threat, or as part of some private wink-and-a-nod deal.


In the law, we have a saying: Silence is acceptance. So curious as to why Moody's was sitting silently by and allowing itself to be a political football, I gave them a call. I didn't tape the conversation, so what follows is a paraphrasing of the key points we covered.

Goldman: Did Moody's ever tell Gov. Warner or anyone else that Virginia must raise general taxes a billion dollars, or else VA would be downgraded from a AAA to a AA?


Moody's: NO.


Goldman: Did Moody's ever say that a billion in new "revenue" was necessary to avoid a downgrade?


Moody's: NO.


Goldman: Did Moody's ever say that higher general taxes were necessary to keep the AAA?


Moody's: NO.


Goldman: Could reduced spending alone, or some combination of user fees and reduced spending commitments satisfy Moody's concerns about Virginia's fiscal solvency?


Moody's: Yes.


Goldman: Did Moody's ever write anything, either in a public or private document, or ever say anything in public or private, that a reasonable person could construe as requiring a billion-dollar general tax increase to avoid a downgrade?


Moody's: NO.


Goldman: Has the governor or anyone from his administration ever indicated that they wanted to engage in a quid-pro-quo arrangement, promising to campaign for a billion-dollar general tax increase in exchange for Moody's agreement to divert from its normal timeline in these matters? 


Moody's: Moody's has agreed to wait until the governor gets through the General Assembly session before deciding whether or not to downgrade Virginia's AAA rating.


So there it is. Moody's, for the first time, has allowed its decision-making to be held hostage to political considerations. Timewise, if my research is correct, the bond analysts would have made their decision by now and then revisited the ranking after the General Assembly Session was over.


As I say, this whole AAA scare tactics doesn't pass the Warner "smell test."


The governor's billion-dollar general tax increase plan is not being demanded by Moody's. Indeed, as the Virginian-Pilot now has conceded, his plan, when you add up all the parts, will make the fiscal mess even worse in a few years.  


This political chess game is not for the faint of heart, AS THIS transparent scare tactic IS based on the conscious decision to leave Virginia taxpayers with a false impression.


Like George Bush, Gov. Warner is betting that the end justifies the means. Sadly, I fear Moody's may be playing the same game.


My politics are different.


Eventually, the people of Virginia will have to chose.


-- February 16, 2004











































Paul Goldman, the Rebel With a Cause, was chief political strategist for the past two winning Democratic governors in Virginia and was credited with leading a "revolution in American politics" by The New York Times for his role in breaking America's 300-year-old color barrier in national politics.


You can reach him at






For another take on the Moody's bond-rating controversy, See "How to Lose a AAA Bond Rating."