Moody’s Reaffirms AAA Rating. Don’t Get Cocky, Virginia.

Storm clouds off the Virginia coast, circa February 2017. Photo credit: Strange Sounds.

Moody’s Investors Service, one of the nation’s three bond rating agencies, has reaffirmed Virginia’s AAA bond rating and stable financial outlook, the Richmond Times-Dispatch reports.

Moody’s had issued warnings that Virginia’s hallowed AAA status was looking fragile, due mainly to a sharp draw down in previous years of the Commonwealth’s budget reserves. The Revenue Stabilization Fund had shrunk to 1.5% of state general funds.

But the new budget, which awaits Governor Ralph Northam’s signature, appropriates an additional $90 million for the cash reserve, writes the T-D‘s Michael Martz, on top of the $156.4 million already pledged from excess revenues carried over from the fiscal year that ended June 30. The budget also will carry forward an expected $60 million in additional revenues from the current year into each year of the new biennium.

Moreover, said Secretary of Finance Aubrey Layne, a surge in income tax payments after the December tax cuts could produce $500 million in additional one-time payments of income taxes.

Bacon’s bottom line: Governor Northam has pulled off quite the trick, expanding Virginia’s Medicaid entitlement while shoring up state finances. While I am happy to see that Virginia remains one of the 14 states with the coveted bond rating, I regard AAA status as a minimal standard, not a mark of great fiscal probity.

Senate Majority Leader Tommy Norment, R-James City told Martz that the Moody’s report came as “no surprise.” He had characterized the warning about losing the AAA rating as “demogoguery and false assertion to try to scare legislators into voting for [Medicaid] expansion. Complete poppycock.”

I sympathize with Norment’s frustration over his inability to thwart the entitlement expansion, which will be paid for in part by a new tax on hospital revenue, which in turn, to an unknowable degree, will be passed on Virginians in the form of higher private health insurance premiums. I also resent that the public was not informed during the Medicaid-expansion debate of the full cost of the expansion, which will require additional revenues, as yet not identified, to increase reimbursement rates for physicians.

However, I also believe that numerous states and the U.S. government are building unsustainable mountains of debt that eventually will collapse during my lifetime with horrific consequences. The Medicare HI trust fund (for hospital payments) will run out in seven years, requiring Congress to come up with $52 billion (and more in future years) to maintain benefits. Social Security is dipping this year into its own trust fund for the first time since 1982; the trust fund will run out in 16 years, precipitating a 22% cuts to the program. Despite a tax-reform boost to revenues and a surge in economic growth, federal budget deficits are approaching $1 trillion a year. And an increasing number of states are one recession away from fiscal meltdown.

Incredibly, as the nation hurdles toward its rendezvous with Boomergeddon, national political leaders have abandoned any pretense of fiscal sanity. The Democratic Party is moving to the left, entertaining dreams of even greater entitlements. Trump-led Republicans fight increased deficit increases only fitfully, trading off increased domestic spending to pump up the military.

Yes, America is enjoying greater economic growth right now, but the jury is out whether the latest rounds of tax cuts will “pay for themselves.” (I remain dubious.) Global growth has been fueled since 2008 by unprecedented credit creation and debt accumulation, and massive structural vulnerabilities lie beneath the relatively placid surface of international finance. Sooner or later, a gasket will blow — Argentinian bonds, Italian banks, the Venezuelan economy, Chinese real estate markets, war in the Middle East, a cyber attack on the electric grid, or a black swan that no one can even imagine — and the shock will cascade in unpredictable ways through the global economy as one debt domino topples another. Sooner or later, the U.S. will experience a recession, and it will be a doozey.

So, yes, there is every reason to question the ability of the federal government to stick to its Medicaid-funding promises. There is every reason to fear that fiscally crippled states like Illinois, New Jersey, Connecticut and Kentucky will slide down the path to Puerto Rico-style insolvency and throw themselves upon the mercy of an already-overextended federal government, even while the threat of massive defaults roils financial markets and drives up the cost of government borrowing. And there is every reason to think that Virginia will experience a repeat of 2008-style fiscal stress, if not worse — even as it is forced to confront multibillion-dollar shortfalls in public-employee pensions that can no longer be deferred. 

Virginia needs to bullet-proof its budget, not with any old army-surplus vest but ceramic-plated Kevlar-backed body armor. We need a AAA+ bond rating. We need to restructure our economy, our land-use patterns, our transportation system, our health care system, our K-12 and higher-ed systems, our criminal justice system, and every other sphere of state and local government to be more fiscally sustainable during bitter times.

I know this gloom-and-doom talk sounds bizarrely unreal in a growing economy with a 3.4% unemployment rate. But the time to prepare for the storm is when it is far offshore, not when it is upon us.

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6 responses to “Moody’s Reaffirms AAA Rating. Don’t Get Cocky, Virginia.”

  1. LarrytheG Avatar

    None of the industrialized countries that provide universal health care are in any danger of going “bankrupt” and that’s because they tax everyone for their healthcare.

    Despite folks here who claim that all money is “fungible” – the reality is that earmarked taxes – like FICA – that funds the HI – has a significant structural nexus that basically enforces fiscal discipline which means you keep track of revenues and expenses of that fund and when expenses exceed revenue – you KNOW IT – AND you cannot just instantly move money from somewhere else to “fix it”. Before you ever get to the “lets get money from general revenues” – questions are addressed as to whether the FICA tax should be increased, should the age for receiving benefits be increased, should those benefits be means-tested and/or should reimbursements be limited on some things that are more discretionary than mandatory?

    Discussions like this are held much less at much less intense levels when entitlelments are funded from general pots of money rather than earmarked taxes that are for that specific purpose and cannot be spent for anything else.

    No Demagoguing “rationing” either. Every kind of “insurance” public or private sets limits – to help insure there is a balance between revenues and expenditures.

    So the taxes Virginians already pay for the MedicAid Expansion – as well as the new Virginia taxes to pay our 10% – are both – earmarked taxes that do impose a fiscal structure that has boundaries that can’t be crossed unless the GA decides to do so. In doing this – we’ve essentially taken these things out of the annual “how much to budget” conundrum and imposed a fiscal structure to go through BEFORE a decision is made to supplement from the general fund.

    This is a fiscally-responsible approach to paying for this – and way, way better than the Ad Hoc methods that cause budget chaos and/or all manner of Ad Hoc things hospitals do – to recover their losses .

    We should be so lucky as to be able ti impose this kind of fiscal structure on other entitlement spending or for that matter Defense spending where it’s basically Katy-bar-the-door process.

    Is it “better” to increases taxes to pay for expanding expenses that are not kept under control or is it better to impose those costs and decisions on those who are paying for and receiving the benefits?

    Like the gasoline tax or other earmarked taxes – there is, in my view, a better process for keeping track of revenues and controlling expenses.

    What Virginia did do – was put some fiscal integrity into the funding for the MedicAid Expansion which is way better than having a budget free-for-all every other year over how much the general fund can provide.

    That’s not boomergeddon. That’s the opposite. That’s a fiscally responsible approah.

  2. “None of the industrialized countries that provide universal health care are in any danger of going “bankrupt” and that’s because they tax everyone for their healthcare.”

    Larry, Greece has universal healthcare and would have gone bankrupt if not bailed out of their sovereign debt crisis. They still may. (They have missed IMF payments.)

    Much of the rest of what you say is misleading or wrong, but I’ll just start with that one from your first sentence.

  3. Steve Haner Avatar
    Steve Haner

    The Governor is hosting his celebration/bill signing right at this time, and while I’m glad the legislators did go ahead and expand coverage and capture that federal match, people who doubt it will cause a financial crunch in the long run are just fools. Mrs. Thatcher was dead on and sooner or later you do run out of other people’s money and need to start taxing your own money.

    The provider tax game which I have described previously will not be sufficient by itself for long. The federal 90 percent match on the expansion segment will not be sustained for many years and will have to blend in with the larger base program. When the final state budget act is printed it will be interesting to do a full comparison to the version from two years ago to see just how much spending jumped outside Medicaid. Trying to keep up with the House, Senate, and then the Rump Conference version has me seeing double right now….

    As we were leaving the Texas Capitol in Austin heading to our car Monday we heard shouting from a demonstration, and as we circled the block saw their “Poor Persons March” at the North Congress Street gate. I heard shouts about expanding Medicaid and thought I’d been transported home. The battle continues there.

  4. LarrytheG Avatar

    re: ” people who doubt it will cause a financial crunch in the long run are just fools. Mrs. Thatcher was dead on and sooner or later you do run out of other people’s money and need to start taxing your own money.”

    No more or less than the money you spend on roads, schools, public safety, etc.

    Ms. Thatcher said a lot of things that don’t reflect the opinions of most Britons on health care. Despite all the demagoguery about it – everyone pays taxes for it and everyone gets it and it never was intended to be all you can eat but rather basic minimum care and if you want more than that – you pony up.

    Britons pay far less for health care than Americans and live just as long or longer..

    the point is that we decide as a society what we value and are willing to be taxed for. We want roads, police, K-12, and a lot of us want health care just like all the other industrialized countries have – who are NOT going broke and most all of their citizens live longer than ours despite all the cries of rationing and waiting for months/years for care

    We don’t say that we are going to go broke over paying for police – even when we are paying more for body cameras. We don’t say that about other expenditures for education or other things – so why do we claim it about some things?

    There is no correlation to WHAT you provide. The correlation is – can you contain the costs – and we do that with education and police and roads and a lot of other things. That’s called fiscal responsibility and it’s REALLY what Moody is actually looking for. Moody is NOT going to DING you for WHAT you spend on – but rather can you maintain fiscal balance…and your outgo is no more than your income – regardless of what you actually spend it on.

    1. TooManyTaxes Avatar

      But Larry, once again there is no discussion of the disconnection between those who want free health care and those who have to pay for it. It’s like my kids when they were little and believe in Santa Claus. As they grew they stopped believing in Santa Claus and realized their presents came from Mom and Dad.

      I have good health insurance through my wife’s compensation as a federal employee (for which I reimburse her 1/2 of the costs). I don’t want any changes. I don’t like the idea that I have to pay additional taxes to subsidize Obamacare for many other people, but I do. I’m not alone.

      People are for expanding health care, indeed, universal health care until they realize they are going to pay for it in the form of higher taxes and lesser coverage. We saw all these compassionate liberal women vote for candidates to expand Medicaid because it didn’t cost them anything. But watch them squeal when their precious children’s class size increases as Medicaid costs push against K-12 spending. And to make universal coverage work, everyone needs to be in the same insurance plan – Medicare for all. Suburban women are used to the superior coverage from their private coverage that they and their spouses have as a result of their jobs. They will scream bloody murder when their better-than-average coverage goes down.

      And we must also see the end to private market doctors. A universal coverage plan cannot sustain the high costs of compensation made by doctors, other health care providers and administrators. They need to go on the government payroll – docs and administrators no higher than SES wages. Many of these liberals are working in or near health care. They will scream when their wages are cut and jobs eliminated.

      I fully maintain the American public is not willing to make major sacrifices to have universal health coverage. I think Obama was wise enough to understand this. But there are a lot of elected officials and wannabes who don’t.

    2. djrippert Avatar

      I hear what you’re saying but where does it end? Nationalized restaurants to provide basic nutrition to everybody? Free public transportation funded by taxes on everybody? Free gyms so everybody can stay healthy by working out? Mrs Thatcher’s comment was in regard to socialism rather than health care per se.

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