No Compromise on the AAA Rating

Virginia Secretary of Finance Aubrey Layne talks fiscal responsibility. Photo credit: Richmond Times-Dispatch

A downgrade of Virginia’s AAA credit rating could cost the Commonwealth between $33.9 million to $72.7 million in additional interest costs on its roughly $4.8 billion in state debt, says Secretary of Finance Aubrey Layne.

“If S&P downgrades and the other two follow, which they usually do, it could cost us millions,” Layne said, as reported by the Daily Press. “No governor, no secretary of finance, no legislator wants to be the guy on whose watch we lost the triple-A.”

Layne based his remarks on a preliminary assessment by the Public Resources Advisory Group, a New York-based consultancy hired by the state. The fragility of the state’s top bond rating has become an issue as the Governor Ralph Northam and the General Assembly continue to tangle with deep structural divisions over the fiscal 2019-20 biennial budget.

Thirty-four million dollars ain’t chump change. But in a two-year state budget of $114 billion, it’s a rounding error. OK, it’s a big rounding error, but it’s still a rounding error. Why do Virginians worry about the bond rating so much?

“Maintaining Virginia’s Triple-A bond rating is more than saving on the cost of borrowing, it is a recognition of being one of the best managed states in the country,” House Appropriations Chair Chris Jones, R-Suffolk, said, as quoted by the Richmond Times-Dispatch. Referring to the three bond-rating agencies that grade government debt, he added, “Virginia has been a Triple-triple A bond rated state for as long as bond rating agencies have conferred the rating, a distinction held only by a handful of states.”

The AAA bond rating is a red line that both Virginia Republicans and Democrats agree must not be breached — a rare example of bipartisan consensus. By itself, a downgrade to AA would not be the end of the world. AA is still investment grade, and Virginia still could issue bonds relatively cheaply. But allowing the rating to slip is like an alcoholic thinking, what the heck, it’s just one little drink, what could go wrong?

Over a couple of decades, AA degrades to A, and then to BBB. Next thing you know, you’re Illinois with billions in unpaid bills and a massive pension liability. And then you’re Puerto Rico, too fiscally feeble to respond effectively to a natural disaster.

At some point, whether ten years in the future or twenty, the federal government will face a fiscal crisis. The national debt exceeds $20 trillion, deficit spending soon will be adding another $1 trillion a year, interest rates on that debt are rising, and Washington, D.C., is neither interested in reforming the entitlement state nor in scaling back America’s global military commitments. Meanwhile, the Medicare Trust Fund for hospital expenses will run out in eleven years and the Social Security Trust Fund will run out in 16 years. And that’s the favorable scenario because it assumes no recessions between now and then.

When Washington plunges into crisis and chaos, we Virginians will be glad we have a federal form of government. And we’ll be glad the state has a AAA bond rating. While Illinois and New Jersey collapse into fiscal insolvency, the Commonwealth will be able to preserve essential functions of government. Virginia’s ability to maintain an orderly government and society is literally what’s at stake. That dystopian future is still a decade or two down the road, so prophesies of calamity seem like scare mongering. But absent a sea change in public and political sentiment that seems nowhere in evidence, that is where we’re heading, and that is why there can be no compromise on the AAA rating.

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16 responses to “No Compromise on the AAA Rating”

  1. LarrytheG Avatar

    re: ” Meanwhile, the Medicare Trust Fund for hospital expenses will run out in eleven years and the Social Security Trust Fund will run out in 16 years. ”

    This is misleading as neither one of the trust fund will EVER run “out of money” as long as FICA taxes continue to be collected.

    Trust Funds are essentially revolving accounts for various earmarked taxes.

    They exist for dozens of Federal activities beyond Social Security and Medicare Part A. For instance, there is a trust fund for Medicare Part B and D, and there are trust funds for Federal employee pensions and for airports and highways

    As long as FICA taxes are collected – money will continue to flow into the trust funds …. they’ll never “run out”.

    Here’s a graphic that shows the difference between Medicare Part A and Medicare Part B (and D) that shows how Part A is primarily funded from payroll taxes while Part B is primarily funded from General Revenues:

    1. This is misleading as neither one of the trust fund will EVER run “out of money.”

      No, Larry, you are confused. The trust funds will run out of money, and when they do, both Medicare (hospitals) and Social Security will be able to pay out in benefits no more than they bring in through payroll deductions. That’s what the trust funds were set up to prevent.

      If you don’t think reducing peoples’ Social Security benefits by 25% will create a political crisis, you’re dreaming.

      1. LarrytheG Avatar

        Jim – you’re confusing the SURPLUS in the Trust Funds with the Trust Funds themselves. If they REALLY ran completely out of money, they’d not be able to pay ANYTHING.

        REDUCING is EXACTLY what you DO have to do for all entitlements if we are to deal with the deficits and debts.

        But again – there are a lot of different ways to “reduce”. Chained CPI. an increase in FICA. taxing social security benefits on a means -tested basis , etc.

        but it wrong to say “out of money” to describe what you are saying.

        it’s NEVER out of money as long as FICA taxes are collected.

        And THAT’s UNLIKE Medicare Part B and MedicAid – in which BOTH
        are largely funded from General Revenues.

        You do a disservice when you do not accurately differentiate between entitlements funded from payroll taxes and entitlements paid from general revenues.

        In ALL cases – you’ll have to reconcile the payouts with the funding.

        1. Larry, you’re arguing over semantics. We all agree upon the mechanics of what happens. What you refuse to acknowledge is that when the S.S. trust fund SURPLUS runs out and people find themselves getting only 75% of what they were promised, it will precipitate a POLITICAL CRISIS.

          1. LarrytheG Avatar

            No Jim – I DO acknowledge that – ABSENT changes that will be made on the tax side and the benefit side for instance pushing the age back .

            It’s NOT semantics to use words and phrases like “run out of money” or “the trust fund will be exhausted” as if SS and Medicare Part A will implode and dissolve..etc…

            It’s ALSO not semantics when in this context – you do not compare and contrast how SS/MedA will work .. compared to Medicare Part B and MedicAid

            How about characterizing Medicare Part B and MedicAid in your “collapse” scenario? How about one sentence to describe one will happen to those entitlements ? Will they too “collapse” and “run out of money”?

            see.. that’s the problem with the narrative… it’s misleading…

  2. Seeking a high bond rating (e.g., AAA) is used by the state and by the counties as a reason to raise taxes. The bond amount is so small that a pay-as-you-go system would suffice.

  3. Steve Haner Avatar
    Steve Haner

    I need to learn how to pull out these slides and highlight them. It pains me that Larry’s digital skills exceed mine…. So you need to open this up and look at pages 23 and 24…This is a way of presenting this data I have not seen before and it gets one’s attention. If this is new, kudos to Secretary Layne for showing this.

    Less than five days? Virginia’s reserve fund in 2016 didn’t have enough money to fund the state for five days? I see that and I’m actually amazed we didn’t get dinged by the rating agencies already. It improved the next year, to ten days, and the budgets (still to be reconciled) pad it a bit more. But no kidding, this is really discouraging and some yelling and finger pointing might be in order.

    This is starting to look like 2004 again and behind the scenes the Powers That Be might already be thinking state tax increase. At the time of the last one (transportation taxes) my prediction was that Medicaid would be the trigger for the next one, and damn if I didn’t nail that. The House budget includes that “provider assessment” of 1.4 percent on private hospital revenue, but you have to hunt back in the fine print to find it.

    1. Five days is a pretty skimpy reserve.

    2. LarrytheG Avatar

      re: ” I need to learn how to pull out these slides and highlight them. It pains me that Larry’s digital skills exceed mine…. So you need to open this up and look at pages 23 and 24…This is a way of presenting this data I have not seen before and it gets one’s attention. If this is new, kudos to Secretary Layne for showing this.”

      That’s some pretty compelling data and I agree… it’s a miracle that the rating agencies did not act .

      I’d be curious to hear from the Jim Bacon Conservative types as to what they would do about it… cut or increase taxes? and Cut what?

      Steve – I can only show images that are on the web and have a full http address and I find them under GOOGLE images with some keyword “shopping” – not successful much of the time.

      I could not do more than you are doing… and I am not finding any of what you are providing as separate address referenceable pages… so the static link for the entire report is as good as you can get unless someone else here has the magic potion. Someone could extract the PDF pages one by one and “publish” and then they’d be refernceable.

  4. Larry, the reports of the Trustees themselves say the Trust funds will be exhausted, just as Jim says. You can read them. You are confusing the Trust Fund (reserves) with the ability to continue to pay some obligations through ongoing taxation.

    You can think of the Trust Funds as the water in a reservoir. The reservoir got filled up fast at first with water from workers, but it is draining rapidly now and the Social Security reservoir will be empty by 2034.

    But, of course, even this metaphor isn’t really accurate. What really happened is that the water that flowed into the reservoir was immediately borrowed and used for current watering projects and was replaced by a promise to refill it at a future date. When the water needs to be provided for retirement projects, current workers not only have to put in their water for their retirement, they also need to put in the water that was borrowed earlier. At some point, the current workers will get parched.

    And once the reservoir runs dry even with the IOUs, it isn’t really a reservoir. It is just a creek again.

    Back to Virginia, I too am shocked that Virginia hasn’t already been downgraded. It has, by far, the lowest level in its rainy day reservoir of all the AAA rated states.

    1. LarrytheG Avatar

      No Izzo. You’re making the same mistake that Jim is by confusing the SURPLUS that is currently in the Trust Fund with how the Trust Fund itself is continuously funded from payroll taxes – even after that surplus is drawn down to zero.

      Yes.. they are paying out benefits faster than the payroll taxes coming in – right now but even when the surplus is “exhausted” , payroll taxes will continue to be collected and benefits paid out – perhaps at reduced rates on a means-tested basis.. perhaps at later retirement ages, perhaps low CPI by using chained CPI, etc…

      but SS will never be “exhausted” or “run out”.. that’s not an accurate description of what will happen and it’s scare mongering to boot.

      If you REALLY want to fear monger – talk about Medicare Part B and Medicaid – neither of them are funded form payroll taxes.. there is no “surplus” to “exhaust”.. 90% comes directly from general revenues… AND .. UNLESS we increase the premiums for Medicare Part B beyond the current $134 month – deficits will skyrocket as more and more retire.

      Contrast that with SS and Med Part A which will continue to be funded – with no deficit spending at all.. neither will affect the deficit and debt at all in their current form. They were designed on purpose to never affect the deficit/debt. The money that is the “surplus” was money put there from excess FICA taxes to start with. It’s money owed to FICA.

      1. Larry, you have a lot of Donald Trump in you. I’m sure attendance at your inauguration was also larger than Obama’s inaugural.

        You can simply read the reports from the SSA Trustees. Why don’t you do that? In the summary it very explicitly says: “The Trustees project that the combined trust funds will be depleted in 2034, the same year projected in last year’s report.” See

        The trust fund is the reserve surplus. There is no projected surplus after 2034. Get your terms straight.

        1. LarrytheG Avatar

          re: the “Trust Fund”. Very familiar with that report Izzo – ALL OF IT –

          I DO ACKNOWLEDGE that he report does indeed include this: ” “The Trustees project that the combined trust funds will be depleted in 2034,”

          However, the word “Depleted” in this context, means the surplus part of the Trust Fund – not the entire operating fund which will continue to be funded by payroll taxes and it will continue to pay out benefits AND is shown on other tables.. to do exactly that… so you do have to read and understand ALL of the report not just cherry pick one sentence or table.

          Here’s the problem in my view. It’s disingenuous…to use terms and narratives to imply that Social Security and Medicare Part A will “run out of money” , ergo.. no longer pay ANY benefits That’s simply not true… and simply NOT what is meant when the report says “depleted”.

          They will NEVER run out of money – as long as almost a trillion dollars a year is continued to be collected in FICA Taxes (and paid out in benefits).

          ALL such funds that exist – public and private – are subject to the very same economic and actuarial forces and have to be adjusted in response to those forces. It’s not just a Social Security thing. It works that way for virtually ever single “fund” designed to pay benefits at some future time.

          You and Jim, may remember, in fact, how Jim’s Private Sector Long Term Care Insurance premium – increased and he was not happy about it but the point was that it had to be – to keep his insurance viable and sustainable so it would be able to pay later and that change more than likely was necessitated by actuarial forces (living longer) and market forces of the monies invested, and economic forces – the actual escalating costs of care itself. All of that – over time.

          Same thing happens to Pension Funds public and private – defined contribution and defined benefit – where market, economic and actuarial factors influence how much money has to be set aside and/or how much can be paid out.

          This is normal and expected. It never means that ANY these funds will be “exhausted” or “run out of money” even when terms like “unfunded liabilities” are bandied about.

          All that really means is that adjustments have to be made upstream if you want to guarantee fixed benefits downstream.

          If no such adjustments are made – then pay outs downstream WILL change.

          These types of funds – do not “collapse” or “run out of money” but they benefits paid will change if adjustments are not made to account for the economic, market and actuarial influences that do affect them.

          The funds remain intact.

          Compare and contrast that to general revenues funded programs – called “discretionary” in the budget – SPECIFICALLY entitlements like Medicare Part B and MedicAid – which have no real process for “adjusting” and as more and more people receive Medicare Part B and Medicaid – more general revenues are needed and these DO add directly to AND INCREASE the deficit and debt – UNLIKE Social Security and Medicare Part A that do not add a penny to the deficit and debt (except to pay back borrowed FICA money).

  5. djrippert Avatar

    “When Washington plunges into crisis and chaos, we Virginians will be glad we have a federal form of government. And we’ll be glad the state has a AAA bond rating. While Illinois and New Jersey collapse into fiscal insolvency, the Commonwealth will be able to preserve essential functions of government. Virginia’s ability to maintain an orderly government and society is literally what’s at stake.”

    Do you really believe that? The federal government goes into crisis and chaos and the Imperial Clown Show in Richmond steps in and guarantees an orderly society? I know it’s 4/20 Jim but you should probably wait to light up until after you’ve written the columns for the day.

    The federal government goes into crisis and chaos … I assume that means badly degraded tax collections, massive federal layoffs, big cuts in every federal program (social security, medicare, federal matching funds, federal education funds, student loan guarantees, federal law enforcement, the military, etc). Northern Virginia and Hampton Roads both go into an economic hell hole, state taxes drop and Richmond follows NoVa and Hampton Roads into the same hell hole. What’s left (economically speaking)? Do you really think that AAA rating would save us? Who would buy the bonds issued by the state (at AAA interest rates)? I sure wouldn’t.

    Virginia gets almost $2 back in federal spending for every $1 paid by Virginians in federal taxes. Even if the federal crisis and chaos let us stop sending our taxes to Washington and send them to Richmond instead (shudder!!) we’d still go bankrupt in weeks if not days.

    If your doomsday scenario comes true, get yourself to the state least dependent on the federal government – that would be Delaware.

    Virginia lives on the teat of the federal government. Money comes into NoVa and Hampton Roads via Washington. The state collects taxes on that money which funds countless jobs in Richmond then redistributes much of what’s left to RoVa. If you’re really worried about the government going into crisis and chaos we should legalize gambling and marijuana, tax the hell out of them and save every cent raised in those taxes, preferably invested in securities denominated in Swiss Francs. When the federal government goes under we’ll sell those investments and try to make up for Washington’s largesse until the feds get bak on their feet. I’ll be at my farm in Maryland where I have lots of guns, lots of ammo and lots of acreage on which to grow food as well as a bay in which I can catch fish. Both the Maryland counties and the Virginia counties on the Eastern Shore have secret plans to blow up the Chesapeake Bay Bridge and the Chesapeake Bridge Tunnel Complex to keep “you people” away! Lol.

  6. LarrytheG Avatar

    At the local level – we are not going to go broke trying to fund education, public safety, libraries, social services, etc.

    we either cut services or increase taxes.

    that’s the way ALL budgets work – whether they are local, state or Federal except the Feds can and do run a deficit/debt.

    but the essential point is missed You cut spending or increase taxes to bring balance to a budget.

    And in the end – that’s what a AAA rating is saying – about the competence in balancing budgets – those entities that ARE given a AAA.

    Folks may have forgotten.. the USA … WAS downgraded:

  7. LarrytheG Avatar

    In the bigger scheme of things – there are political philosophies as to whether or not it is a proper Govt role to do programs like Social Security, Medicare and, in fact, pensions.

    Should the govt do them or should they be the complete responsibility of people and the govt not do any of it?

    Do we want to get the govt out of doing these things and evolve to a country where each person bears that responsibility and the govt will not “rescue” them if they fail in their own responsibilities?

    I totally acknowledge that as a real issue and it will continue as a debate.

    However – in carrying out that debate – it is simply not true that the govt is not capable of operating such funds for those purposes – competently or sustainably as they do and they have for decades – all the while – many private sector companies have actually failed to do so and the govt itself has had to step in and make people whole in those cases.

    I simply reject the narrative that the Govt cannot do this.

    Every single industrialized country on the planet earth – does this – and those countries where the govt does this – they have the highest literacy and life expectancies on the planet and all the countries that don’t do this – have lower literacy rates, poverty, and lower life expectancies.

    Govts do this and people benefit It’s not without problems. Govt, which is basically people performing govt functions – can be and are incompetent and fail at their duties while many others are competent and succeed

    The Credit Rating entities reflect this Some govt entities are exceedingly competent and successful at managing money. Some are abysmal failures. The greater majority fall somewhere in between.

    There are 14 states with AAA – Virginia is one of them but teetering on the edge.

    There are about 7 jurisdictions in Va that are AAA out of about 133 entities

    There are 11 countries out of over 200 that are AAA – and the US is NOT one of them!

    What this tells us is that Government – CAN manage budgets competently and sustainably as well as some Govts that fail at it.

    But the continuing Gloom and Doom narratives that Govt – as an entity, as an institution , cannot do this – is just flat wrong.

    Social Security is not a “failure” . it’s, in fact, a sustainable program… but it DOES have to be maintained as such.. it cannot operate successfully without competent management.

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