The outlook on nearly $500 million in Maine bonds was downgraded by a debt-rating agency just weeks before the state launches a bond offering.

Moody’s Investors Service cut the outlook from “stable” to “negative,” citing Maine’s weak financial reserves and high Medicaid costs.

The lower outlook, just weeks before a $55.8 million bond offering, creates the risk of a rating downgrade over the next 12 to 24 months, Moody’s said. That could increase the state’s borrowing costs, analysts said.

“The short-term impact is none. The long-term impact will depend on if we see any downgrade,” said Robert Lenna, executive director of the Maine Municipal Bond Bank.

Some analysts said that once an outlook is changed to negative, the chances of a formal downgrade are high since the state must do an enormous amount of work to resolve Moody’s concerns.

“It’s fait accompli. It’s going in the wrong direction,” said Joe Cuetara, senior vice president at Moors & Cabot investment services in Boston. “It’s so hard to be upgraded. It’s easy to be downgraded. You really want to hold on to your good rating.”

Moody’s said the negative outlook “reflects Maine’s recurring challenges on the spending side of its budget, primarily in the Department of Health and Human Services, which includes Medicaid.”

Spending for MaineCare, the state’s Medicaid program, was one of the most contentious issues of the legislative session that ended Thursday. Over Democrats’ objections, the Legislature voted Tuesday to reduce MaineCare benefits as part of a package to close an $83 million budget shortfall in the DHHS.

The rating agency also cited a lack of reserves or liquidity in the state’s general fund. That leaves Maine with limited options to handle unexpected shortfalls, Moody’s said.

Moody’s affirmed the rating of Aa2, third-highest, on the $498 million in general-obligation bonds and assigned the same rating to the upcoming bond offering.

The issues of Medicaid costs, rainy-day reserves and bonds have caused political firestorms in recent weeks.
Gov. Paul LePage on Wednesday signed the budget bill, which closes an $80 million shortfall in the state Health and Human Services Department budget and includes a number of cuts in Medicaid benefits.

 The governor has 10 business days to veto bills. Speculation in the State House was that bond issues in the nearly $96 million package approved Wednesday would be the most likely candidates.

Moody’s said Maine politics played no role in the outlook change, which occurred on Thursday. Moody’s said the timing of its decision to change the outlook was because of the upcoming issuance of bonds and coincided with a routine review.

The concern with the Moody’s action is the potential of a rating downgrade.

That could be triggered if there’s significant budget gaps, an absence of a plan to meaningfully improve the state’s reserves in the near-term, or slower than expected economic recovery that hurts revenue growth, Moody’s said.

In February, Fitch Ratings, Inc. changed its outlook for Maine’s creditworthiness from “stable” to “negative.” Standard and Poor’s also has said Maine’s credit outlook is negative because of smaller than necessary reserves. The state suffered a ratings downgrade in May, 2005.

During the past several months, state officials said they have been in talks with national rating agencies about Maine’s credit rating.

“I appreciate the helpful guidance from Moody’s as Maine continuously strives to improve its credit rating. I note that Moody’s recognized the positive financial impact of state government eliminating $1.7 billion of our unfunded public pension liability last year. This year, the rating agency acknowledges the long-term financial health of our ongoing initiative to right-size our Medicaid program,” said Maine State Treasurer Bruce Poliquin.

Democrats fired back that the Republican-led government triggered the Moody’s move with policies, such as L.D. 849, “An Act to Provide Tax Relief for Maine’s Citizens by Reducing Income Taxes,” that they claimed “would put Maine in a continual budget crisis.”

“Despite warning after warning from credit agencies, from economists, from Democrats, and even people within their own party, they’ve proven that the only direction their fend-for-yourself economic agenda is moving Maine is down,” said Maine Democratic Party Chairman Ben Grant.

In addition to Medicaid costs, Moody’s cited concerns about Maine’s reserves or rainy day funds.

The issue of reserves came into focus with the passage of L.D. 849. The bill calls for the state to take money out of excess revenues to lower the income tax, but only after some of the money is used for other purposes.

Analysts said the Moody’s move causes no immediate financial concern, but the negative outlook and threat of a downgrade could hurt future bond offerings. A downbeat opinion from a rating agency for a state is like a consumer getting a bad credit report, analysts said.

“The real implication is looking forward when the state and other borrowers next go to market,” Lenna said. “They’ll need to talk to the market about what Moody’s concerns were, about what happened and what the state is doing to address the concerns.”

Poliquin said the Moody’s action was unconnected to the upcoming $55.8 million bond offering and a $96 million bond package that is on the governor’s desk.