Moody’s upgrades ratings on Washington’s $19.4 billion general obligation bonds. Washington among 10 most leveraged states.

Washington state’s debt received an upgrade from Moody’s.

Moody’s Investors Service has upgraded the ratings on the State of Washington’s approximately $19.4 billion outstanding general obligation bonds, including bonds additionally secured by motor vehicle fuel taxes and toll revenues, to Aaa from Aa1…

The upgrade of the general obligation bonds and school bond guarantee program to Aaa reflects a significant increase in financial reserves even as the state increased funding for K-12 education in response to a state supreme court mandate, the exceptional growth of the state’s economy driven largely by the technology sector in the Seattle metro area, and the consequent diversification of the state’s economy… Additional strengths include above-average wealth and income levels, and the state’s strong fiscal governance practices. While the state’s debt levels are above average, they have been declining relative to the 50-state medians and the state’s debt and pension liabilities combined and fixed costs are comparable to medians.

The upgrade is a good thing for our state and its taxpayers, as state Treasurer Duane A. Davidson points out

“Not only does the Aaa rating reflect highly upon Washington’s credit, it will help ensure that when we finance schools, roads and other important projects, we do so at the lowest possible interest rates,” Treasurer Davidson said.

…Although Washington ranks among the top ten most leveraged states across the country, Moody’s expects it will continue to address any budget gaps that may emerge as it has in the past.

The Washington Research Council cites some ongoing concerns, however.

Though Moody’s considers Washington’s outlook to be stable, it writes that a “protracted structural budget imbalance and/or a shift to reliance on one-time budget solutions” could lead to a ratings downgrade.

We wrote about Washington’s budget sustainability policies earlier this year, noting that they work when they are followed. Moody’s is certainly correct that Washington’s reserves have increased, but they could be even higher. Instead, the Legislature opted to spend all the extraordinary revenue growth the state has experienced over the past few biennia, and it has diverted revenues away from the rainy day fund.

In The Lens, TJ Martinell writes,

… a 2019 debt affordability study by the State Treasurer’s Office notes that at 14.1 percent, the state’s total fund balance as a percentage of revenue is not only above average, but it is the eight-highest of any state.

…Although Moody’s report anticipates that “the state will continue to address any budget gaps that emerge, as it has in the past,” it warns that one of the following could cause Moody’s to downgrade Washington’s rating:

  • An unexpected downturn in the state economy;
  • Prolonged budget challenges, including use of one-time revenue solutions to plug spending gaps; and
  • Depletion of unrestricted reserves in the state general fund.

Davidson and other Treasurer’s Office officials have warned against spending increases that leave little in the general fund.

Good advice heading into the 2020 legislative session. The upgrade is something to both celebrate and protect.