Moody’s Investor Service has announced that it has raised the rating of Washington state’s outstanding obligation bonds from an AA1 to a AAA in spite of its high debt liability.
This is the highest rating achieved by Washington. For state officials like State Treasurer Duane Davidson, the rating bump means Washington will be able to issue general bonds at lower interest rates.
“It will help ensure that when we finance schools, roads and other important projects, we do so at the lowest possible interest rates,” he said in a statement.
At the same time, Deputy Treasurer Jason Richter told Lens that it’s not clear to what extent the credit upgrade will improve bond interest rates. That situation is likely to change once another bond series sales in September is concluded, he added.
Nevertheless, he said the credit upgrade “will make our bonds slightly more attractive to buyers. We’ll have a little more ground to stand on when we’re discussing the rates at which bonds are being priced.”
In its report, the financial service company cited Washington’s “significant increase in financial reserves” despite new and significant investments in basic educationThe cost of McCleary compliance in response to a 2012 State Supreme Court decision. According to the latest Economic and Revenue Forecast Council (ERFC) report from June, the state is projected to have $2.2 billion in the budget stabilization account (BSA) by the end of the 2019-21 biennium, and $2.9 billion by the end of the 2021-23 biennium.
The report also noted “the exceptional growth of the state’s economy driven largely by the technology sector in the Seattle metro area, and the consequent diversification of the state’s economy lessening dependence on aircraft manufacturing by The Boeing Company.”
“I’m thrilled that Moody’s has formally recognized the financial strength of the state,” Davidson said. “Washington has one of the strongest economies in the country, as well as a business base that has become increasingly diverse.”
The report also cited the state’s “conservative financial practices” such as requiring a portion of surplus revenue be deposited into the BSA and a balanced budget requirement that caps operating budget spending to projected revenue levels based on a four-year outlook developed by ERFC.
Washington currently has $19.4 billion outstanding general obligation bonds used to finance capital projects including transportation. While that places it in the top 10 most leveraged states, Moody’s report notes that: “the state’s debt and pension liabilities combined and fixed costs are comparable to (other state) medians.”
Also, a 2019 debt affordability study by the State Treasurer’s Office notes that at 14.1 percent, the state’s total fund balance as a percentage of revenue is not only above average, but it is the eight-highest of any state.
Richter added that “Part of that debt level is a growth story. Washington has a growing population, and we have a pretty big number of people that have or will be moving here. That requires new schools and new roads and new facilities for these people. East coast states have a different story.”
Although Moody’s report anticipates that “the state will continue to address any budget gaps that emerge, as it has in the past,” it warns that one of the following could cause Moody’s to downgrade Washington’s rating:
- An unexpected downturn in the state economy;
- Prolonged budget challenges, including use of one-time revenue solutions to plug spending gaps; and
- Depletion of unrestricted reserves in the state general fund.
Davidson and other Treasurer’s Office officials have warned against spending increases that leave little in the general fund.
In addition to the state’s general bond obligations, Moody’s also either reaffirmed or upgraded the rating for other state and local bonds, including the state’s $517 million outstanding Federal Highway Grant Anticipation Revenue Bonds (reaffirmed at an A2 rating) and the City of Aberdeen’s Series 2002 Special Revenue Bonds from an Aa3 to an Aa2.