S.C. Statehouse Report
Sunday, Aug. 7, 2005
VIEW: http://www.statehousereport.com/columns/05.0807.credit.htm

COMMENTARY
Credit rating downgrade is economic red flag
By Andy Brack
SC Statehouse Report

AUG. 7, 2005 - When Standard and Poor's Rating Services downgraded South Carolina's stellar AAA credit rating last month, state lawmakers should have seen an economic red flag.

And despite news that another service, Moody's Investors Service, decided to let the state to keep its AAA rating, the state is far from out of the economic woods. Lawmakers need to take a serious long-term look at how they spend money and how they raise revenues if they want to again become the vanguard of state fiscal management.

The state's credit ratings, just like your personal credit score, is important because the higher or better the credit rating, the less that the state has to pay in interest costs to fund borrowing. In short, it's an indicator of how well the state, mnages its finances.

South Carolina first gained the AAA credit rating in the early 1960s under then-Gov. Fritz Hollings. It kept the rating through 1993, when it lost it, as most agree, because of the economic strain put on the state by 1989's Hurricane Hugo. Interestingly by 1996, South Carolina became the first state ever to regain its AAA credit rating. Why? Because of its conservative practices of limiting state debt, having a constitutional amendment for a balanced budget and having a "rainy day" reserve fund.

Even though Standard and Poor's has now dropped South Carolina's rating to AA+, it remains in one of the top 10 states nationally in terms of financial management, said Clemson economist C. Bruce Yandle.

But the downgrade may be a sign of more trouble ahead.

Standard and Poor's reduced the state's rating because of its sluggish economy and continuing high unemployment rate. Over the last year, the Palmetto State has lost more than 16,000 jobs, including 5,000 manufacturing jobs. With the recent passage of the Central American Free Trade Agreement, there's good reason to worry that thousands of more manufacturing jobs will move overseas, particularly in textiles and manufacturing, if the experience offered by the North American Free Trade Agreement is an example.

Similarly as the nation is rebounding from recession, South Carolina remains a place with one of the nation's highest unemployment rates - - 6.3 percent. Unless the state can generate some jobs, the economy may remain sluggish and mired in economic mud.

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Other signs of trouble:

State revenues. While the state is on target to repay "rainy day" funds and trust funds raided by lawmakers a couple of years ago at the bottom of the recession, lawmakers continue to look for ways to cut revenues. With the state still recovering, that might not be too smart, economists say. By trying to cut more, they would be taking away the money that could help fix state government in the short run and give more confidence about longer-term stability to rating agencies and economists. The zeal to cut taxes will increase pressure on revenues, which will make state government less stable over time, economist Harry Miley noted.

Other taxes. By having the nation's lowest gasoline and cigarette taxes, South Carolina also is missing revenue that other states are using to improve economic stability.

Education funding. Miley added that cuts to higher education funding, compared to levels from recent years, also add to instability. Additionally, a soon-to-be-decided lawsuit by poorer school districts seeking equitable school funding may result in a whopping verdict that causes the state to incur millions of dollars in upgrades that it doesn't now have the money for.

"There's just a lot of negative factors for the state that are adding up and a reluctance of the legislature to address them," he noted.

In a column on the AAA credit rating last month in The State newspaper, Comptroller General Richard Eckstrom was blunt: "Let's be honest about this: It'll be tough to regain our AAA. It might not be possible."

And while he called on state officials to work together and not point the fingers of blame, he then went on to point fingers at lawmakers for raiding funds and spending recklessly in the recent past.

That might not be totally fair, but he's right that state lawmakers need to look at the big, long-term picture and not apply quick fixes that will add to instability.

RECENT COMMENTARY


McLEMORE'S WORLD
8/7: Sales force

Another great cartoon from Bill McLemore:


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FEEDBACK
8/1: Property taxes are a scourge

To the editor:

I continue to enjoy your column. I wanted to make the comment that your allude to (Commentary, July 10), but fail to fully explore. Property taxes are just an inconvenience to the financially better-off in South Carolina, but they are the difference between land-ownership (which often means a better life financially) and making ever higher rent payments for the rest of your life. It should be illegal to lose your land in this country if you don't owe anything on it. Property taxes turn property owners into renters. If you don't believe this is true, quit paying your property taxes and see how long you get to keep what you "own". The sad fact is, this only affects the poorer among us, because those with the money to pay their taxes don't lose their property. Also, with the number of people in this country who are only able to "make ends meet" from refinancing their property every few years rather than from their income, this is a huge deal. I'll bet we might be surprised at how high that number is nationwide.

-- Raymond Owens, North Charleston, S.C.

Recent feedback:

KEEPING TRACK
Ahead on Santee Cooper

This section tracks past forecasts by Statehouse Report with other media reports:

In Statehouse Report:

5/15/05: Public service has one master, not two: "While all of this has been going on, some members of the Santee Cooper board (i.e., Gov. Sanford's appointees) have become increasingly activist in nature. Charges are flying that board members are micromanaging on everything from corporate contributions and power contracts to working intimately on a privatization study...

"Santee Cooper's struggles should serve as a reminder to members of state governing boards that public service requires them to carry out two duties. First, there's a "duty of care," which calls for board members to ensure an organization is running effectively and efficiently. (This gives an entrée for meddling.) But board service also carries a "duty of loyalty," which means members must serve the interests of the organization over interests of anyone else, such as a governor."

In The Post and Courier

7/19/05: Santee Cooper directors, governor blamed in report. "A bipartisan panel of five state senators was scheduled to release a report this morning saying Santee Cooper board members repeatedly and recklessly mismanaged the state-owned utility for more than two years, capping a months-long investigation that included 22 hours of hearings and about 10,000 pages of e-mails and documents.

"The statement, written by Sen. Luke Rankin, said bullying by a few rogue board members jeopardized the power company's stellar credit rating and could have been costly for taxpayers and the utility's customers and bondholders. The report also said those directors deflated morale at the utility while pursuing a political agenda for Gov. Mark Sanford, who appointed them to their posts."


SOUTH CAROLINA SCORECARD

Here's a "thumbs up" and "thumbs down" related to various political events from the past week:

Thumbs up

House GOP. It's good that the House Republican Caucus returned a state Chamber PAC check because they didn't want it to look like their votes had been bought and paid for. Wonder about all of those individual contributions?

Sanford. Hats off to the governor for saying that education funding should be studied before property taxes changed. If the taxes are altered, there could be a serious disruption to the education funding stream.

Richardson. Three cheers to Sen. Scott Richardson, R-Beaufort, for the idea of a coastal caucus.

Thumbs down

State Dems. The party better get more money in the bank if it wants to be competitive. Empty isn't a good place to be.

Folks. Former Sanford spokesman Will Folks can't have it both ways on a criminal domestic violence charge, but he seems to be trying to get it by saying he'll plead guilty to avoid a messy trial, but claims to really be innocent. Huh?

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