State's AAA Bond Rating At Risk

Moody's Investment Service, a credit rating agency, sent a letter to state officials in July stating that recent economic woes and budget difficulties could result in a bond rating downgrade.

The AAA bond rating, which is the highest possible, allows the state to borrow money at a comparatively low interest rate. A drop in the rating could increase the interest rate the state is charged, costing the state millions of dollars.

A downgrade in the state's bond rating also could hinder the University in its effort to upgrade to a higher bond rating. The University and the state have separate bond ratings, but the state's bond rating affects the University's because the University is state funded.

Ray Murphy, Moody's Investor's Service vice president, said the state's rating has a negative outlook but that projection could change depending on the outcome of budget negotiations. "We are anxiously waiting for the completion of the budget of the state," Murphy said. "At that point we'll have a sense of whether the rating is appropriate."

Factors contributing to a lower bond rating include the state's debt burden, fiscal health and economic outlook.

North Carolina faced a $850 million budget deficit during the last fiscal year caused by economic slowdown and damages from Hurricane Floyd. State lawmakers are still struggling to construct a budget nearly two months into the fiscal year.

The increased interest cost of a higher rating could also be applied to the $3.1 billion higher education bond approved by voters last November, which significantly increased the state's debt.

But Deputy State Treasurer Bob High said the potential credit downgrade is not related to the increase in the state's debt created by the bond.

"Issuing debt does not cause a downgrade," he said. "What the rating really means is an independent analysis says we're not managing our finances as well as we have in the past."

But a potential downgrade of the state's bond rating could spill over to affect state institutions, like UNC-system schools, each of which is given its own bond rating.

UNC-Chapel Hill officials said the University is poised to reach an AAA bond rating, which could save the University $1.2 million in interest fees.

Susan Fitzgerald, Moody's Investor's Service senior vice president, said it is possible for state universities to obtain a higher bond rating than their supporting state, especially when universities have independence in their finances and governing.

Two bond-rating institutions recently lowered Tennessee's bond rating. When the state's rating lowered, Tennessee State University's rating followed suit.

UNC-CH Chancellor James Moeser said the University does not have as much autonomy compared to some other state universities, meaning that its bond rating might be affected by the state's. "We are very much tied to the state -- 30 percent of our budget comes from the state."

The State & National Editor can be reached at stntdesk.unc.edu.