Ratings Agencies Sharpen Focus on States

State agencies in Tennessee are drafting plans for how they would cope with federal funding cuts of up to 30 percent, The (Nashville) Tennessean reports . While the exercise envisions a worst-case scenario under the federal debt-reduction plan, it is also meant to appease credit-ratings agencies that have sent a stark warning to Tennessee and four other states.

As Stateline reported , Moody’s Investors Service warned last month that a downgrade in the federal credit rating could be especially problematic for five states – Maryland, New Mexico, South Carolina, Tennessee and Virginia – that rely heavily on the federal government, even if they have managed their own finances relatively well. Now that the federal government’s rating actually has been downgraded in the wake of the politically messy debt-reduction deal, Wall Street ratings agencies are closing in on a decision about whether those states also represent a riskier investment.

A team of Tennessee officials met with two of the ratings agencies, Moody’s and Fitch, in New York last week to discuss the state’s prospects of keeping its sterling AAA credit rating, The Tennessean reports. The agencies asked the state to come up with a plan for how it would respond to sweeping cuts in federal assistance, which are a possibility under the federal debt deal. Agencies are now assembling plans for both 15- and 30-percent cuts in federal money, the paper reports, noting that federal funds make up about 40 percent of the state’s $30.8 billion annual budget.

Mark Emkes, Tennessee’s finance director, said he and other officials stressed during their meeting with the ratings agencies that there is “political will” to balance the budget in Tennessee. That is an apparent reference to the political gridlock that has plagued Congress and which led another ratings agency, Standard & Poor’s, to downgrade the federal government for the first time ever. In Tennessee, Republicans control both legislative chambers and the governor’s office.

The Tennessean notes that Tennessee Governor Bill Haslam will lead another delegation of state officials to meet with all three major credit-ratings agencies in September, when a decision about a potential downgrade of state ratings may be imminent.