Maine Goes to Market

Was this free money, or what? Maine voters seemed to think so, last year authorizing the State Treasurer to borrow up to a quarter of a billion dollars for all sorts of good things--road improvements, economic development, land acquisition, water protection, building renovations on college campuses, etc. The list was split between two ballots five months apart, perhaps under the hopeful notion that two smaller lists might somehow cost less than one big one. And we bought it! Channeling old Alka-Seltzer commercials, I can't believe we ate the whole thing.

Fortunately, the Baldacci Administration is not spending the whole thing right off. Treasurer David Lemoine explains in an e-mail that Maine seeks to reduce borrowing costs by "borrowing no more than is needed, no sooner than we need it." Allocations are made on a quarterly basis through Bond Anticipation Notes (BANs). The notes mature at the end of each fiscal year, at which time "we go to the markets for long term (up to 10-year) bonds and use the proceeds to pay off the BAN debt. We work throughout the year with the agencies, legislature, Governor and underwriter to match debt service with budget."

As of Monday Maine had rung up BAN debt of $88,820,000--roughly one-third of the total amount authorized by voters in 2007. So in June we will have to issue general obligation (GO) bonds totaling at least that much, or one-fifth of the total GO debt already outstanding as of December 31. This will reverse a three-year trend of declining GO debt. Maine's annual debt service comes to over $100 million, and that figure is rising.

Maine tries to time its borrowing to actual need, but not to interest rates. In Lemoine's words, a relatively steady capital improvement plan allows for costs to "even out over time. This approach also provides for a more level budgeting approach from year to year." So even with impaired credit markets in 2008 and increased volatility in long-term rates, Maine will conduct business as usual.

Earlier this month Lemoine joined the treasurers of ten other states in a petition to the three largest ratings agencies--Moody's, Fitch, and Standard & Poor's--to have the same rating scale applied to municipal markets that is used for corporate markets. State issuers are currently held to a higher standard than corporate borrowers even though their default rates are historically lower. As a result, states such as Maine (rated only AA by Fitch and S&P) have incurred higher borrowing costs by having either to buy bond insurance or to swallow higher interest rates. Lemoine figures the penalty came to $78,000 for the 2007 bond sale.

In a hearing last week in Washington, Massachusetts Congressman Barney Frank, chair of the House Financial Services Committee, gave the ratings agencies one month to unify their credit standards, or else. Moody's promptly offered to comply, but Maine needs the other two to do the same.