Governor Wes Moore signed the FY26 budget for Maryland on Tuesday. The United States House of Representatives just passed what it calls the Big Beautiful Bill, which is a budget bill with add-ons. And the Anne Arundel County Council hosted its final public hearing last night on the budget that I proposed to them.
And a bond rating agency called Moody’s is keeping score. Their job, along with S&P and Fitch, is to assess the fiscal outlook of governments for investors who lend them money in the form of bonds. Higher ratings can lead to lower borrowing rates for governments.
Moody’s was good to us. They upgraded our county to AAA in 2022, because they saw that we’d done the hard things, like getting our capital budget under affordability, growing the revenue that we needed, and expanding our rainy day fund. This year, they grilled us on the impacts of federal cuts, but noted in reaffirming our rating that many of our federal jobs are in defense, where Trump has said he wants to grow spending to $1 trillion. Fitch and S&P did the same.
Moody’s downgraded the United States this year, specifically citing the Big Beautiful Bill. They point out that it explodes the deficit, and according to this week’s nonpartisan Congressional Budget Office report, it also transfers significant wealth from the lowest earners to the top earners, a trend that economists believe is bad for growth. Fitch also lowered the US rating.
In Maryland, Moody’s noted that we’ve had a longstanding structural deficit that, despite being addressed this year by the Governor and General Assembly, would be exacerbated by federal actions.
Most press didn’t cover it, but the very next day Fitch did reward the actions of state leadership this year and reaffirmed Maryland’s AAA rating. If S&P does the same in the coming days, as most observers expect, there will probably be no impact on the interest Maryland pays on its bonds.
I still think the Moody’s downgrade is fair. Nobody knows what the economic impact will be of combining a retreat from global trade, deportation of essential workers, a retreat from infrastructure investments, dismantling of the public and nonprofit sectors, and a constitutional crisis. The ability of Maryland, the United States, and Anne Arundel County to stay solvent in the face of these threats is unclear.
On the off chance that the analysts at S&P have not yet decided on Maryland’s rating, and on the even slimmer chance that any of them read my Weekly Letter, here’s my pitch for why Maryland deserves a AAA.
Bond ratings should reflect whether governments are willing to make the hard business decisions, the hard budget decisions, that preserve fiscal health.
We went through a period in Maryland when the Governor and General Assembly hardly spoke to one another. The Department of Legislative Services repeatedly noted that federal grants and job vacancies were the cause of large fund balances and one-time budget surpluses, and they called for solutions that were never implemented. That would have been a legitimate time to lower Maryland’s bond rating, in my view.
But now things are different. Governor Moore took office and said publicly what the rating agencies needed to hear. He said that the state had been on a sugar high, that we’d need to start doing honest math. And he started making cuts.
The budget that Moore signed this week is exactly what bond rating agencies look for. It’s a demonstration that government in Maryland works. The $2 billion in cuts are painful. They are a product of negotiation between the House, the Senate, and the Governor. All knew that they’d be unpopular, but they did them because fiscal health matters.
The $1.6 billion in new revenue is also painful. The slight millionaire tax increase seems pretty popular these days, even to some Republicans, and the income tax cut for most of the rest of us is appreciated. It’s the 3% tech tax that is causing the most controversy, and some say that the Governor should have vetoed it, since it wasn’t part of his original proposal. But I disagree. The budget fix is a puzzle. It’s the product of compromise. There were no easy paths.
So, S&P analysts, this is why Maryland should get a AAA rating. Our government functions. It makes hard decisions. It works within its own rules, and it will pay its bills.
And for those still stuck on that 3% tech tax, compare it to the double digit import taxes we are all about to pay on almost everything. If those tariffs were only 3%, even the United States would have a chance of keeping its AAA rating.
We only need three Republican members of Congress to join their friends across the aisle to reassert Congressional control over tariffs. Any takers? Please?
Until next week…