Quick Reaction to State Bond Downgrade

August 18, 2002

RALEIGH — Today’s decision by Moody’s Investors Service to downgrade North Carolina’s bond rating revealed the pointlessness of last year’s massive $700 million state tax increase, according to two senior staff members at the John Locke Foundation.

In a preliminary analysis of the Moody’s decision, which reduced the rating on North Carolina’s general obligation debt from Aaa to Aa1, Locke Foundation President John Hood and Vice President for Research Roy Cordato observed that Gov. Mike Easley and state lawmakers had cited the need to preserve the bond rating as a prime reason for enacting increases in income, sales, and consumer taxes last fall.

“Our political leaders said we had a choice: pay higher taxes or lose our precious bond rating,” Hood said. “Instead, the taxpayers got hit both ways.”

The Locke Foundation had previously pointed out that the impact of a downgrade on annual debt service expenditures would likely be a tiny fraction of the annual cost of tax increases. “Still, we shouldn’t have had to pay both costs,” Hood said.

Moody’s stated in a release that “the rating change reflects the state’s continued budget pressure, its reliance on non-recurring revenues, and its weakened balance sheet.” Unfortunately, Cordato noted, the North Carolina General Assembly is exacerbating the problem this year by planning to use between $670 million and $800 million in one-time budget savings or fund transfers to pay for ongoing expenses.

“Lawmakers are setting us up for big tax increases, or for additional bond downgrades, over the next two years,” Cordato said. “It’s time for some leadership and some real fiscal restraint, not more gimmicks and tax hikes that will further weaken our economy.”

For more information on the bond downgrade, visit the Moody’s web site at: http://www.moodys.com/moodys/cust/research/genoa/Report/Rating%20Update/600025763/2001500000390341.asp?namedEntity=Rating+Update