S. Carolina credit ratings threat cause unclear

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Who lives in South Carolina and who runs the state might both contribute to South Carolina's unhappy position among five states that could see their credit rating from Moody's Investor Service slip if the federal government defaults.

Last week, the rating agency announced that South Carolina, Maryland, New Mexico, Tennessee and Virginia could all come up for a rating review and potentially drop below their current Aaa rating. A lower credit rating makes it more expensive to borrow money for infrastructure projects.

John McDermott, the chairman of the Department of Economics at the University of South Carolina, pointed to several factors, including the state's high rate of poverty and Medicaid expenditures, its large military community and its heavy reliance on sales tax for revenue -- a source that dropped when the Great Recession hit.

Assigning more pointed blame for South Carolina's vulnerable status can be subjective and political.

"I don't think the threatened downgrade is a result of anything the state has or hasn't done," state Comptroller General Richard Eckstrom said, adding that state leaders will meet with Moody's representatives today.

"One of the values in having the rating agencies ... meet with state officials is the rating agencies get some idea that the state as a whole is working to address the problems," Eckstrom said. "How well do state officials work together? How well do the branches work together? ... It's all very subjective."

He said the state lost its top Aaa rating from Standard & Poor's about 10 years ago, just before he took office as treasurer. Agency heads pressed the state's case to the rating agency and succeeded in having the Aaa rating reinstated, only to have it slip again in 2005 to AA-plus. South Carolina has an Aaa rating from Fitch Ratings, the other major rating agency.

Matt Mitchell, a research fellow at the Libertarian-leaning Mercatus Center, stressed the risks attached to accepting federal dollars.

"The state policy makers who should bear responsibility are the U.S. representatives and senators," Mitchell said. "And not the state governors and legislators, because they're not the managers in the sense that they determine how much matching funds come from the federal government."

The federal slice of South Carolina's spending has been a consistently higher percentage than the federal expenditures by the states as a whole, according to the National Association of State Budget Officers.

Federal funds as a percentage of all states' combined spending in 2008 was 26 percent. For 2009, it was 30 percent, and for 2010, NASBO estimated it would be 35 percent.

But for just South Carolina, during each of the past three years, the slice of federal money was 32 percent in 2008, 35 percent in 2009, and projected to be about 45 percent in 2010, according to NASBO's most recent report on state expenditures .

Though experts generally agreed it was unlikely South Carolina's rating would slip and even less likely the state would raise taxes or see investment move to other states, McDermott offered one more caveat.

"These ratings agencies are very touchy these days because they were severely criticized during the financial meltdown for calling corporate debt Aaa when it really wasn't," he said. "Now they're being a little more sensitive and giving warnings in advance."


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