State's Budget Problem Raises Question About Credit Rating
Credit rating agencies are taking notice of the ongoing political gridlock in Louisiana’s legislature, and it could lead to higher borrowing rates for the state.
Much like individuals, states are graded on their ability to pay back a loan. Think of it like your personal credit score.
“As an individual, if you’re out to buy a home or a car, that certainly may show up and be an indicator to people who might be lending you money about your ability to repay," says Jim Richardson, a professor of economics at LSU.
He says it’s the same idea for the state. Instead of cars or homes, the state is borrowing money to pay for infrastructure projects, like roads and bridges.
“And obviously," he explains, "the people who lend us money want to know something about our ability to repay this loan.”
Standard and Poor's, one of the three major credit rating agencies, issued a report this week saying the continued uncertainty over Louisiana’s budget is not a good sign. This S&P report does not mean the state’s credit rating has dropped — yet. But rating agencies like to see financial stability, which is something Louisiana doesn’t have right now. And the Legislature has yet to present any long-term solutions.
"The agencies like permanency as opposed to temporary fixes," says Richardson, "and we tend to be masters of the temporary fix."
There are 10 ratings S&P gives out. The better the rating, the lower the interest rate. The best is AAA. The worst, BBB-.
"As it goes down those letters, then obviously the rate that you pay goes up," he says.
The state's rating with S&P is AA-. That hovers right above the middle.
Over the past two years, Louisiana’s credit rating has been downgraded by all three agencies.