Revisionist History on the Moody’s Credit Watch?

The Daily Press in Newport News has leaped to the defense of the Warner administration against Republican charges that the state’s massive budget surplus vitiates the case for the 2004 tax increase. The anonymous editorial responds that Warner was acting to protect Virginia’s AAA bond rating. I suspect that some subtle re-writing of history is occurring, but I’m not certain. Sayeth the Daily Press:

The 2004 revenue hike wasn’t about needs. It wasn’t about spending for the greater joys of liberalism’s causes. It was about preserving the state’s credit rating in the face of a threatened downgrade from one of the most influential bond-rating agencies in the country.

Thanks to five years of combining tax cuts with new spending commitments, Moody’s Investment Services put the state on its watch list in late 2003 and told state officials, in no ambiguous terms (they gave North Carolina officials the same message and made good on the threat), that Virginia needed to shore up its financial house or else.

As a point of fact, the tax increase was about needs, and it was about increasing spending on liberalism’s favorite cause, K-12 education. Gov. Warner made it a top piority in the current biennial budget to increase K-12 spending to meet Standards of Quality guidelines.

But on to the more interesting point. Yes, Virginia was indeed on Moody’s credit watch. However, my (very fallible) memory recalls that only Mark Warner, John Chichester and Vince Callahan met with Moody’s, and none of them were very forthcoming with details in public about exactly what Moody’s told them. I don’t know what Moody’s said, and neither does the Daily Press. Far from speaking in “in no ambiguous terms,” Moody’s adominition that Virginia “needed to shore up its financial house” was highly ambiguous. The only thing we know for certain is that Moody’s never told Virginia directly to increase taxes.

My sense is that Moody’s, like the Oracle of Delphi, spoke with such ambiguity that the listener could hear what he wanted to hear. I don’t get the sense that a Moody’s downgrade was imminent. Judging by Warner’s justification for the 2004 tax increases — he emphasized an intermediate-term mismatch between state revenues and obligations (based on now-discredited assumptions of low rates of revenue growth — Moody’s was worried that the state budget might be heading for a train wreck, not that a train wreck was about to happen. But, then, I never investigated the issue closely, so I don’t pretend to speak with authority on the subject. Perhaps my fellow bloggers can lend some insight.

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  1. Will Vehrs Avatar
    Will Vehrs

    I can’t really offer any new and penetrating insight except to ask, what does this say of Moody’s acumen that they didn’t forsee the positive economic indicators that are fueling the current surplus?

    Maybe they did. Maybe that’s why they might have been ok with the small tax increase, instead of the large one that certain Senators wanted.

    Who knows? As you say, the whole process was and is shrouded in mystery.

  2. Anonymous Avatar

    I would strongly encourage all your readers to reivew the statement that Moody’s issued when it removed Virginia from credit watch.

    They cited…

    1. The budget & tax reform compromise in 2004
    2. The cap on the balloing costs of the car tax.

    If you’re against those things, the things Moody’s cited, then you’re for leaving us on credit watch (or worse, getting us downgraded).

    Maybe you think that’s ok. The anti-everything conservatives would like our AAA bond rating downgraded to AA so that the state can’t borrow as much. It makes it harder for the state to do things (like build schools) and for the right wing it “chokes off the beast.” That’s there position. Let them defend it.

    Don’t try revisionist history about what Moody’s would have done – they made it pretty clear in their statement!

  3. Will Vehrs Avatar
    Will Vehrs

    Well, anon, then the question becomes how quickly Moody’s would have taken Virginia off “credit watch” when the surpluses started to appear without the tax increase.

  4. Jim Bacon Avatar
    Jim Bacon

    Anonymous 11:13, No one would disagree that the tax increase and car-tax cap was responsible for removing Virginia from the credit watch when it did. But, to reiterate Will’s point, that’s a very different thing from saying that the AAA bond rating would have been downgraded had we not done those things — especially when it was evident, even while the debate was taking place, that state revenues were coming in much faster than Finance Secretary Bennett had forecast.

  5. Anonymous Avatar

    It’s reasonable to expect that Moody’s might have seen the same thing that Appropriations Chairman Vince Callahan sees – that the revenue growth right now is NOT sustainable. It’s based entirely on federal (homeland security) spending in NOVA.

    The reason Moody’s took us off the list was budget & tax reform becuase it stabilized our LONG TERM revenue and expenditure modeling. The only other way we could have gotten off the list were significant cuts to the state budget to put the two in line – and House Republicans were unwilling to do that.

    Why don’t you’ll ever call out those in the House Republican Caucus that said we raise taxes that the sky was going to fall and the economy was going into the toilet. Now it’s growing again. Hmm… maybe that’s the story. Invest in essential public services –> Grow the economy.


  6. Jim Bacon Avatar
    Jim Bacon

    Anon1113, You make a legitimate point: Virginia’s current rate of economic growth is unsustainable. The super-heated NoVa economy cannot keep up the growth rate of the past two years, which was fueled by massive injections of federal spending. NoVa’s economy will continue to grow — just not as fast. Conceivably, an up-tick in the growth rate of RoVa (Rest of Virginia) could make up for a de-celeration in NoVa. But there’s no real basis beyond wishful thinking to suppose that will happen.

    That’s why it’s entirely justified to use conservative asssumptions when preparing revenue forecasts. Please note that, unlike some others, I have not trashed John Bennett for making conservative assumptions. Better to run a surplus than a deficit, I always say. My gripe is the fact that the Warner administration and allies based their justification for tax increases on those conservative assumptions.

    I’m not a dogmatist who opposes tax increases under any and all conditions. But I’m not a tax-first-ask-questions later person either. My philosophy: Raise taxes only when there’s no alternative, not on the basis of inherently fallible revenue forecasts on what might happen four to six years out.

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