Moody economy

As Virginia finished a lean year with a revenue surplus, Gov. Bob McDonnell voiced outrage Tuesday that the state's bond rating could be downgraded for the first time ever because of Washington's inability to balance its budget and manage the federal debt.

Moody's Investor Service warned Virginia and four other states their AAA credit scores could be lowered if the federal government's superlative bond rating also is lowered.

"I'm very unhappy. In fact, we're furious," McDonnell said, lashing out at both Congress and the White House over their inability to agree on a package to reduce spending and raise the nation's $14.3 trillion limit on borrowing by the Aug. 2 deadline. Without a deal, the United States would default on debt for the first time in its history. Any action on the states' ratings would come within 10 days of a federal downgrade.

"It's a national embarrassment to the United States of America to get two weeks from defaulting," he said.

Preparing for the worst

Last week, McDonnell and top aids discussed a contingency plan if the federal government does default on its obligations.

On Washington's doorstep, Virginia is rich with military bases, defense and government contractors and federal employees. That's particularly true in the two most populous regions, the state's economic engine: the northern Virginia suburbs of Washington, including the Pentagon, and Hampton Roads, home to the world's largest U.S. Navy base.

And then there's Medicaid. Virginia and the feds split the budget 50-50. If the U.S. is unable to pay their half, the state could be saddled with more financial obligations than it could handle.

Virginia could also be susceptible to any fallout in the capital markets, depending on what's happening at the federal level.

"One of the factors that goes into a rating for a state is the health of their economy, so if the federal government is cutting back on activity within that state, that could weaken the economy," said Naomi Richman, Moody's managing director.

Virginia, with a long legacy of debt aversion and tight budgeting, has never had less than a perfect bond rating, a guarantee to investors and institutional borrowers that the state presents the lowest possible risk. A rating downgrade means the state would pay higher interest rates to borrow money for capital projects.

"So, through no fault of our own, we have a AAA bond rating that's been in place since 1938 that we've been informed, just hours ago, may be in jeopardy ... because of the inability and the ineptitude of the president and the Congress to reach a deal on how to fund the obligations of the United States of America," the usually reserved McDonnell said at a news conference.

Democrats said McDonnell's surplus announcement is disingenuous given the number of obligations the state has ignored.

State Sen. A. Donald McEachin compared it to a working person declaring a personal surplus on payday before any of the bills are paid. Local governments have seen state aid for programs administered locally slashed, forcing cities and counties to either cut services or levy more taxes to pay for them, said McEachin, D-Henrico.

"Virginia has $600 million in unfunded VRS liabilities and over $3 billion issued in road bonds," said McEachin, referring to the state retirement system. "Those are outstanding bills that will need to be paid."

Hoping for the best

If the federal government decides to cut programs like Medicaid to cover its expenses, the Richmond Times-Dispatch reported that McDonnell could authorize a treasury loan to offset Washington's problems. In other words, Virginia would return the favor, bailing out Washington in the hope that cash will trickle back to the state through federal programs.

Should Moody's lower the U.S. government's rating due to a default following a failure by the government to raise the nation's debt ceiling, the firm said it will conduct another review of the five states to gauge if their financial position and governance are strong enough to overcome the impact of a U.S. downgrade.

If Virginia is able to loan to the government, that could impress Moody's and save the state's credit rating, the Dispatch reported.

For now, lawmakers are keeping their fingers crossed.

The Associated Press contributed to this report.

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