Governor Kasich’s budget resolves the projected deficit, in part, by taking $440 million in debts and “restructuring” it to become due later. It’s like “saving money” by refinancing your house with a brand new 30-year mortgage that replaces the 30 year mortgage you took. Sure, your monthly payments are lower, but that’s because you’re paying off the debt later.
Just like your FICO score, the State’s bond credit ratings are incredibly important. The better your ratings; the cheaper it costs you to borrow money. Since Kasich’s budget is looking to refinance $440 million debts out of this biennium, if he could convince the Wall Street public bond rating agencies (Standard & Poor, Moody’s, and Fitch) to upgrade Ohio’s credit rating, it means his refinancing won’t cost Ohioans as much for delaying repayment of the State’s debts.
Back on March 25th, the Dispatch reported that Kasich and his top budget officials were headed to Wall Street to meet with the big three bond rating agencies to present his budget. Governor Kasich was cautiously optimistic that Wall Street would be so impressed with his budget that they’d upgrade Ohio’s bond rating, which is impressive given that across the board Ohio already had the second highest rating a State can get.
“What I think they’re really going to like is eliminating the structural deficit,” Kasich told The Dispatch after a speech to Wayne County business leaders in Wooster. “And I think they’re going to like what we’re doing with JobsOhio, what we’re doing with the Common Sense Initiative. I think they’re going to like things where they look at it and say, ‘If these things work, they’re going to boost the economy of the state.’
Kasich will tell rating analysts today that his budget proposal would recalibrate the state’s finances. But he’ll also have to satisfy them that his proposals to privatize state assets, realign Medicaid and cut funding to local governments would set Ohio on the right path.
Remember that the Administration and its supporters maintain that Kasich’s budget is vastly superior to Governor Strickland’s budget, which relied on one-time federal stimulus money. That coupled with the very kind of “debt restructuring” that Kasich’s budget does was why the bonding rating companies temporarily lowered the State’s rating to the third highest in 2009 until they rating it back up once they were convinced that Ohio’s revenues were improving from a sustained economic recovery under Governor Strickland.
After Kasich’s presentation a few weeks ago, Standard & Poor still give Ohio its second highest credit rating with a negative outlook… unchanged from Strickland.
Here’s what Moody’s had to say about Ohio’s strengths before Kasich:
— Conservative fiscal management that helped the state to withstand the recession, despite employment levels that have lagged the nation in recent years
— Established practice of prompt action to address budgetary shortfalls
— High, though diminished, levels of internal liquidity
Moody’s misses Ted, too.
Now here’s what they said about Kasich’s budget:
As in fiscal 2010 and 2011, a debt restructuring is expected in fiscal 2012, along with the privatization of five prisons and the state’s liquor enterprise, representing the bulk of non-recurring revenues in fiscal 2012 and bringing the structural imbalance down from 9% of revenues in fiscal 2011 to approximately 3% of projected revenues in 2012. If the state realizes current revenue projections, the proposed budget projects structural balance for fiscal 2013.
The outlook for the State of Ohio is negative, reflecting reliance – though decreasing – on non-recurring measures and likely continuation of sluggish economic performance that will make it difficult for the state to rebuild financial reserves even as the national economy recovers.
In other words, no different from how they viewed Strickland’s last budget. Ohio’s creditworthiness is no better under Kasich’s budget than it already was under Governor Strickland.
And here’s what Fitch had to say about Kasich’s budget:
The proposed budget contains one-time measures to achieve balance. One-time measures in fiscal 2012 total $848.5 million, including $440 million in savings from a proposed debt restructuring and $258.5 million from the transfer of the state’s liquor enterprise to a state economic development authority; the state believes there is a potential for $100 million of these measures to be recurring. One-time measures drop to $115 million in fiscal year 2013 and the state also believes there is potential for these measures to be recurring. The budget does not contain any revenue raising measures.
The state also expects to receive approximately $515 million in additional federal matching funds for Medicaid (FMAP) that was not assumed in the biennial budget.
State debt management is generally conservative although the enacted budget assumed debt restructuring to provide $736 million in savings over the fiscal 2010-2011 biennium and additional restructuring is proposed for the coming biennium.
Note the middle paragraph because this is news to us. While Governor Kasich proudly boasts to everyone who will listen how proud he is of House Budget Chairman Paul Ryan (R-WI)’s budget which slashes funding for Medicaid, he’s telling Wall Street he’s expecting to get $500 million more in federal Medicaid matching funds than his budget projects. Ryan was one of Kasich’s Budget Committee aides when he chaired the Committee in the mid to late 1990s. Hypocrisy much, Governor?
Anyways, Fitch also finds that since Kasich’s budget relies on one-time money and is delaying payment of the State’s debts through “restructuring” they don’t see any reason to rate the State’s bond rating any higher than it did under Strickland.
Folks, the Governor went 0-3 with the big three public bond rating agencies in trying to convince them his budget was better than Ted Strickland’s. To the extent that they criticized Strickland over relying on “one-time”federal stimulus money, they criticized Kasich for doing the same with his privatization schemes. Lehman Brothers alum John Kasich couldn’t sell his budget on Wall Street.
But surely Wall Street loves Kasich’s anti-union agenda, right? Austerity is in! Just look at the popularity of New Jersey Governor Chris Christie, right? Well, earlier today Bloomberg reported that there’s a decided segment of the economy that doesn’t like the Christie method of austerity: municipal bond traders:
While the 48-year-old former prosecutor who denied Jon Corzine a second term in 2009 says he has made New Jersey a “national model,” the cost to insure its debt exceeds every state except Nevada, Illinois and California in the credit- default swaps market, according to pricing data compiled by CMA. Protecting $10 million of New Jersey bonds against default for five years took $149,000 annually yesterday, trailing California by about $77,000 and Illinois by $67,000 among 16 states tracked by the London-based firm.
After all, for all of Christie’s bluster there’s this little problem with his next budget:
New Jersey faces a $10.5 billion deficit in fiscal 2012, which at about 37 percent of its current budget is the second worst among states, according to the Center on Budget and Policy Priorities. The Washington, D.C.-based nonprofit organization focuses on issues that affect lower-income Americans.
Yep, even after all of Christie’s “austerity” measures, New Jersey still leading the nation in State budget deficits. New Jersey’s credit rating is presently two grades lower than Ohio’s and at serious risk of going lower. As a result of the higher cost of borrowing due to Christie’s induced bond ratings, Bloomberg reports that it has forced the State’s to halve the bond offering it was planning to issue to fund their economic development efforts.
Remember when Christie took office, his first budget had to deal with a $2 billion deficit. He “balanced” it, in part, by slashing funding for public education and not making any contributions to the State’s pension funds, and denying middle class families’ property tax relief. Now his State is wrestling with a budget deficit five times as large. Christie’s anti-union rhetoric while not really addressing the State’s deficit is costing the State substantially.
“Christie’s got his own battles going on with the unions,” said Scott Albrecht, a senior vice president at Federated Investors in Pittsburgh who manages $1 billion in municipal debt. “That’s not a credit positive.”
The extra yield investors demand to hold New Jersey’s 10- year general-obligation debt reached 64 basis points, or 0.64 percentage point, compared with the average AAA tax-exempt rate for similar maturities on Sept. 9, the widest since at least November 1994. The difference, or spread, began widening when Christie took office. It stood at 14 basis points yesterday, about twice the four-year average under Democrat Corzine. Since January 2010, the spread has averaged about 40 basis points.
“He can say a number of things and we’re going to say, ‘Great, I hope that’s true,’” said Matthew Buscone, who manages state and local government investing at Breckinridge Capital Advisors Inc. in Boston. The company oversees $12 billion in assets.
“It’s hard to make a trade on the rhetoric,” he said.
So not only has Kasich’s budget failed to improve what was already an outstanding bond rating under the Strickland Administration, but you also have to wonder when the municipal bond market is going to start to consider the impact of Kasich’s budget has on Ohio’s municipalities. Kasich’s budget is going to make it more expensive for cities and school districts to borrow money. You can literally bank on it on Wall Street.
John Kasich went to Wall Street expecting them to practically throw him a ticker tape parade. He came back with reviews that the best that could be said of him was they weren’t any worse than Ted Strickland’s budget.
Once John Kasich loses Wall Street, who’s left in his corner?