by James A. Bacon
Gov. Bob McDonnell is chapped that the inability of the buffoons in the nation’s capital to reach a budget deal and raise the debt ceiling could impact negatively on Virginia’s AAA credit rating. He made the comments last week in response to news that Moody’s Investor Service had put the state rating on a review downgrade list because of its reliance on federal funding. (See the Times-Dispatch article.)
I am sympathetic to a degree. Democrats and Republicans in Washington, D.C., are playing a game of chicken — the car is heading toward a precipice and the first guy to take his hand off the wheel loses. Unfortunately, the American economy is in the back seat. There could be a lot of collateral damage, including Virginia’s AAA rating.
On the other hand, Virginia’s dependence upon the federal government is no secret. I’ve been harping upon it for a long time on this blog. I’ve also argued, on the grounds that federal default on its debt is highly likely within the next 15 to 20 years as I explained in my book Boomergeddon, we need to get our fiscal house in order while we still can. The first order of business is increasing the strength of the commonwealth’s balance sheet — paying down long-term debt, not adding to it. The second order of business is de-coupling the Virginia economy from its excessive reliance upon federal spending for economic growth.
What has McDonnell done? Well, he championed a transportation-funding plan built around the borrowing of $3 billion, thus pushing state indebtedness to the limit of what it can handle without jeopardizing its AAA rating. Also, his economic development strategy has emphasized attracting more federal investment in the state, thus making our economy even more dependent upon the fiscal health of the federal government.
It’s fine to lecture Congress — we all do it! But that’s no substitute for crafting sound fiscal and economic development policy. If the debt ceiling talks do crash, pointing a finger of blame at Congress won’t cut it. Moody’s won’t be impressed. One thing Moody’s will want to know is what contingency plan the governor is developing in case Uncle Sam does run off the cliff. Do we have a plan? If we do, the governor hasn’t made it public. I have submitted an email request to McDonnell spokesman Jeff Caldwell for details.
Here is Caldwell’s response: “Because we do not know a) if a deal will come together to mitigate the impact, b) what that plan would entail or c) what cuts will be made and how they will be made if no deal is reached, we really cannot ascertain the size or scope of any impact to Virginia. We have been examining areas where we think there could be impacts, but cannot make any firm contingency plans because of the uncertainty of what impacts we may see from the federal government.”
Fair enough. The uncertainties are massive.
