A financial agency that recently downgraded Maryland’s bond rating drew sharp words Wednesday from Treasurer Dereck Davis (D), and a suggestion that Maryland might break from the company.
The state’s decades-long string of AAA ratings from all three bond-rating agencies ended a week ago when Moody’s, one of the three top rating agencies, downgraded Maryland to Aa1. Davis, whose office is responsible for issuing the bonds that help pay for major projects, including schools and infrastructure, said he takes the downgrade personally.
“So, you know, to hell with Moody’s,” Davis said at the outset of Wednesday’s Board of Public Works meeting with Gov. Wes Moore (D) and Comptroller Brooke Lierman (D).
For more than 50 years the state has held Moody’s highest rating — part of a treasured triple AAA rating from Moody’s, Fitch Ratings and Standard & Poor’s. Fitch last week reaffirmed the state’s AAA rating, just one day after the Moody’s downgrade. Standard & Poor’s is expected to release its newest rating before the state’s scheduled June 11 bond sale, but officials have not expressed concerns that it will be a downgrade.
Maryland uses the three agencies to annually assess the state’s creditworthiness. The ratings determine how much interest the state — and taxpayers — will pay for the money it borrows through annual bond sales. Each of the agencies is paid by the state for the ratings.
Davis strongly implied Moody’s services may no longer be needed.
“Now you’re seeing why, if you also do some research, more and more states are also moving away from Moody’s,” Davis said. “They’re not the standard-bearer” they once were.
Davis, speaking during the board meeting, also suggested the agency had other considerations as it issued its report last week.
“I know in the case of Maryland, when you’re paying $229,000 they got to give you something. They’re not going to just hand out, as we say in school, A’s for nothing,” Davis said, adding that the company was selling subscriptions to investors and “you know, you got to give people a reason to buy it.”
Moody’s did not respond to requests for comment Wednesday.
Unknown implications and ‘sour grapes’
Davis’ comments underscore a deep frustration and concern about how transparent the Moody’s review process has been.
Moody’s downgrade for Maryland was the first since it gave the state an AAA rating in 1973. Standard & Poor’s has given Maryland an AAA rating since 1961, while Fitch Ratings has graded Maryland’s bonds AAA since 1993.
“I understand his frustration,” said House Appropriations Chair Ben Barnes (D-Anne Arundel and Prince George’s). “Maryland’s fiscal outlook, particularly with the actions we took last session, remains strong. This is evidenced by our retention of our AAA rating with Fitch. So, Moody’s report does seem a little contradictory, not just with other rating agencies but with their own assessment which called our economy ‘wealthy and diverse.’”
Senate Budget and Taxation Chair Guy Guzzone (D-Howard) said he shared some frustration with the rating after a difficult budget negotiation earlier this year.
“I felt like we did everything we possibly could as a legislature and a state,” Guzzone said, referencing the budget that included taxes and cuts and costs shifts. “I think we overperformed.”
Guzzone said it is “hard to know what the implications would be, from a technical standpoint,” if the state dropped Moody’s. “But I respect the treasurer,” he said. “I trust his instincts.”
‘Every state can pay its bonds’
For decades, Maryland governors and lawmakers have pointed to the vaunted triple credit ratings as a sign of the state’s fiscal management. Up until last week, Maryland was one of more than a dozen states with the highest rating from the three major agencies.
For Davis, the only thing that should matter is whether a state will pay its bills.
“This is about your fiscal picture and outlook, and that’s a fair discussion, but it shouldn’t be about your bond rating,” Davis said. “A bond rating is just your ability to pay back bonds. And quite frankly, if I’m buying your bond, I don’t care what your fiscal outlook is, unless it affects your ability to repay bonds. And since states can’t file for bankruptcy or anything like that, it’s prohibited by federal law, that’s off the table.”
Davis said Moody’s analysts dismissed his argument by saying: “Well, by your definition, every state should be a AAA-rated state.”
“Yeah, absolutely every state can pay its bonds,” Davis said.
For nearly 100 years, no state had defaulted on a bond payment. Arkansas was the last to do so during the Great Depression, Davis said. “I’ll give them a pass on that,” he said.
The same old complaints
Concerns began to grow about a year ago, when Moody’s reaffirmed the state’s AAA rating but bumped the outlook for Maryland down a notch, from stable to negative. The firm cited concerns about ongoing costs to the state including pensions — a perennial issue.
“Everything that Moody’s said about Maryland, they’ve said every single year since I’ve been treasurer,” Davis said. “Hey complained about the high debt, the [state employee] pension liability, blah, blah, blah. But at the end of the day, they always reaffirmed our AAA bond rating. I can only speak for my time, but they said it in ’22. They said it in ’23. They said it in ’24. They said it under a Republican administration. They said it under a Democratic administration.”
Another concern was the growth of ongoing state government spending. Topping that list are the costs driven by the very expensive public education reforms known as the Blueprint for Maryland’s Future.
The 2024 report noted the state’s high costs but relatively stable personal income tax base that was bolstered by federal employment and its proximity to the District of Columbia.
In a passage that now seems prescient, Moody’s — six months before the 2024 election — raised concerns about Maryland’s “vulnerability to swings in federal spending.”
State Budget Secretary Helene Grady said she and others believed the budget introduced by Moore and amended by the legislature addressed the state’s fiscal issues.
“We believe strongly that we checked the box on that primary concern and their expectations there,” Grady said, speaking about a meeting with the firm earlier this month. “So, we walked them through in meticulous detail that and how we solved our budget shortfalls for both fiscal ’25 and ’26, and that we cut in half the projected shortfall by fiscal ’30 from $6 billion to $3 billion.”
Guzzone agreed. “We addressed everything that was within our control,” he said.
Outside the budget, the state has a number of tools at its disposal to address a fiscal crisis. The Board of Public Works can trim as much as 25% from the budget without the approval of the General Assembly. If more is required, the legislature can return for a special session.
The state also has the ability to raise sales, income and property taxes.
State officials seemed to believe their budget efforts coupled with a history of managing bond payments would be enough to retain the highest rating for another year.
“We spent a lot of time walking them through probably an extraordinary level of detail on both those questions to help them understand why the deficit was where it was and how we closed it specifically,” Grady said.
It was not enough.
The dominoes begin to fall
Moody’s had additional concerns.
President Donald Trump (R) and his aggressive cuts to federal agencies, spending turned the state’s large number of federal employees, contractors and grant recipients — once seen as a stabilizing factor in a state whose revenues are driven by personal income withholding — into a liability. Moody’s said in march that Maryland was at higher risk than any other peer state to federal upheaval.
“What this federal government is doing is going to have a very significant adverse impact in Maryland,” said former Treasurer Nancy Kopp. “I think we will handle it well. And I think that the focus on the budget, the structural deficit this year is evidence of that.”
Shortly before its downgrade of Maryland, Moody’s lowered the District of Columbia’s rating from AAA to Aa1, citing impacts from federal workforce reductions and weakening demand for commercial real estate
That came days before Maryland met with the rating agencies. All three got the same presentation in individual sessions.
“You sort of know their questions, and you know what your what your story is,” Kopp said of such presentations. “They’ve gone through all the numbers that Fiscal Services and DBM [the Maryland Department of Budget and Management] have.
“I don’t think that it isn’t transparent,” she said. “The problem is not that it’s not pretty transparent. The problem is we may not agree with the emphasis they put on certain factors.”
A ‘self-inflicted regional economic crisis’
All three firms met earlier this month with state officials including Davis, Lierman, the Board of Revenue Estimates and legislative analysts. The annual meetings are the basis for the annual credit ratings that precede bond sales.
Only Moody’s visited the state in person. Moore, Senate President Bill Ferguson (D-Baltimore City) and House Speaker Adrienne Jones (D-Baltimore County) attended the meeting, unusual for a bond-rating meeting, and each made brief comments.
The trio of State House leaders did not attend the virtual meetings with Fitch or Standard & Poor’s.
State officials were caught off guard by how quickly Moody’s released its report, coming nearly a week after its meeting in the Treasury building in Annapolis.
Democrats were quick to respond, issuing an angry rejection of the rating. They blamed Trump’s focus on slashing the federal government.
Grady called Moody’s focus on federal budget and employment actions “very much speculative” and “premature.”
Moore noted that Trump has similarly affected the credit rating of the federal government. Days after Moody’s downgraded Maryland, the firm dropped the federal government’s rating from AAA to Aa1 — identical to Maryland and the District.
Moody’s was the last firm to downgrade the federal government. Standard & Poor’s cut its rating in 2011, citing concerns about the country’s fiscal condition and congressional foot-dragging on dealing with the debt ceiling. Fitch followed suit in 2023, also noting concerns about debt-ceiling fights that could prevent the government from making debt payments.
Moody’s, in its review, said the federal government was accumulating debt at a concerning pace.
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” the Moody’s report said. “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
The firm wrote that it expects larger federal deficits over the next decade because of entitlement spending at a time when federal revenues will flatten.
“In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher,” Moody’s wrote. “The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.
Moore said the “result is nothing short of a self-inflicted economic regional crisis that has now been ignited by the Trump-Vance administration and is having very real consequences in our communities and very real consequences on our macro economic outlook.”
“Basic services from public education to health care are now hanging in the balance,” he said.
Moody’s has a story to tell
Across the Potomac something different happened.
Moody’s did not downgrade Virginia. Five days after issuing the report on Maryland, the firm reaffirmed Virginia’s AAA rating with a stable outlook, even though the commonwealth also has a significant federal government presence.
In its report, the firm cited Virginia’s “pledge of its full faith and credit and broad revenue base to repay the bonds. The Aaa issuer rating reflects a stable economy with a sizable federal government presence, a long history of conservative financial management, strong liquidity and fund balance levels, comprehensive debt and pension management practices resulting in below average total liabilities and a very strong governance structure.”
Maryland, with a population of nearly 6.3 million, is a company town: The Economic Policy Institute, a left-leaning policy research group, estimates that Maryland has the second-largest percentage of its population employed by the federal government, at 7.3%, second only to the District’s 13.2%. Virginia, with a population of more than 8.8 million, is third with 5.6%.
Grady said she and others were unsure how Moody’s arrived at its decision to downngrade Maryland and reaffirm Virginia’s rating “That’s a question in our minds, as well,” she said.
“When you read the Moody’s report, it really doesn’t come through, other than speculative federal impacts,” Grady said. “There’s very little else to point to to warrant the change at this point in time.”
Kopp, the former treasurer, sees a pattern.
“I think this, this story that Moody’s is telling, and I may differ from all my friends in this story that Moody’s is telling, … is, to me, a legitimate story,” she said.
“I do think that their story … is about what’s happening at the federal level, and what the impact is on the states directly,” Kopp said. “And I think they’re right about that. I think our economies, obviously, and investment in Maryland is going to be hit more severely by the direct impacts.”
Kopp expressed continued confidence in how the state weathers the crisis while managing its budget and paying its bills. She questioned whether the downgrade would ultimately affect interest rates or enthusiasm for buying Maryland bonds.
“It’s very interesting. I cannot wait until June 11 and to see how it all plays out,” Kopp said. “Because I really don’t know. I do not believe this in itself will make that big an impact on what we have to pay. I think it could have an impact on how the financial markets look at Maryland, but Moody’s is not making up facts.”
Maryland Matters is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501(c)(3) public charity. Maryland Matters maintains editorial independence. Contact Editor Steve Crane for questions: scrane@marylandmatters.org. Follow Maryland Matters on Facebook and Twitter.