Edwards follows pattern with state debt downgrade
It shouldn’t be a surprise that Louisiana has endured adverse credit rating changes since Democrat Gov. John Bel Edwards assumed office, completing a downgrade trifecta last week.
Over a year after Moody’s Investors Service started the trend – just over a month after Edwards took office and had led the Legislature into special session to deal with fiscal issues – followed by Fitch Ratings months later, S&P Ratings completed the sweep of lowering the state’s credit rating. Additionally, Moody’s reaffirmed its negative outlook, meaning it anticipated more likely a downgrade to come in the future than the rating maintaining, which at present makes Louisiana one of the lowest rated states in the nation. Ratings assess the overall fiscal health of an entity, where the healthier a government’s finances, the lower interest rate lenders demand.
Moody’s commentary explicates well Louisiana’s underperformance. Last year, it noted reasons for the downgrade as “rapidly deteriorating revenue collections due in part to the continuing low oil price environment, a looming fiscal 2017 gap that could be as large as 20% of general fund revenues, and the effects of years of structural imbalance on the state's reserves and liquidity.” The negative outlook then came from “the state's continued budgetary risks and the likelihood that movement toward structural balance is likely to take time … also … revenue forecasting risks, Medicaid cost containment implementation risks, and uncertainty over attainability of budget balancing initiatives.”
A year later, with Louisianans socked with hundreds of millions of dollars in health care tax increases to pay for Medicaid expansion and billions more in general tax increases, the situation remained mostly unchanged, according to Moody’s latest communique: “The negative outlook … reflects continuing risks regarding a fiscal cliff looming in fiscal 2019 as tax increases roll off, uncertain revenue forecasts, implementation challenges and legislative reluctance to enact significant changes to the state's revenue structure.”
Naturally, Edwards drew the wrong conclusion in his remarks about last week’s developments. True, he acknowledged “structural tax and budget reform is critically important for our state’s future,” but then erred by linking this to changes that “also bring in sufficient revenue to support the state services a vast majority of state legislators believes is important to maintain for their constituents.”
Whether a “vast majority” of legislators would answer his clarion call to squeeze more money out of Louisianans, likely disproportionately a minority of the population, in order to pay for services or tax breaks of little actual need, is at best dubious. Note the entire absence of any offer to cut spending and remove counterproductive breaks; this from the man who last year considered spending at a level nearly $900 million more than today would lead to catastrophe and yet state government chugs along with almost no ill-effects from putting big government on a partial diet, mostly against his will.
But, perhaps more interestingly, the downgrades have continued a historical pattern where these typically occur with big spending Democrats while Republican governors who tried to shrink government’s footprint saw upgrades during their tenures. Since 1972, looking at S&P Ratings, Democrat chief executives suffered downgrades in 1984, 1986, 1987, 1995, 2005, and 2017, while their Republican counterparts enjoyed upgrades in 1990, 2000, 2003, 2008, and 2011. The only outlier came with 1988’s downgrade early in Republican former Gov. Buddy Roemer’s first year in office after inheriting the worst budgetary mess in the state’s history from Democrat former Gov. Edwin Edwards.
This speaks volumes about governance, where the only time a tax increase figured in an upgrade was in 2003 with change that increased income taxes more than it reduced sales taxation on items for home consumption. Repeal of the higher income tax rates roughly coincided with the 2008 upgrade.
And it leaves us with the same lesson: you cannot tax and spend your way to sound fiscal health. Rather, right-sizing government produces the best results – which Edwards stubbornly refuses to acknowledge.
Posted by Jeff Sadow at 10:50