Wall Street reaffirmed Virginia's financial reputation Thursday, saying the state's decisions to revamp the tax code and freeze a popular program to cut car taxes justify its AAA, best-in-the-nation credit rating.
Less than three weeks after lawmakers concluded a marathon 118-day legislative session by approving a $60 billion, two-year budget, Moody's Investment Service formally ended its warning to its clients that Virginia's finances were uncertain. In a short release, the agency said investors should buy the state's bonds with confidence.
Moody's said the improving state economy, the car-tax freeze and the willingness to impose higher taxes "will restore the state's structural balance and illustrate the strength of the Commonwealth's long tradition of conservative financial management."
The statement by Moody's is a victory for Gov. Mark R. Warner (D), who had repeatedly warned that a failure to fix the state's imbalance between revenue and spending would jeopardize its AAA bond rating, which it has held since 1938. A lower bond rating would have increased the cost of borrowing and left a permanent stain on the state's financial reputation, he argued.
After a bitter fight, lawmakers approved a $1.5 billion plan that will increase taxes on cigarettes, sales, corporations, the elderly and property deeds. The package also lowers some income taxes, cuts the tax on food and gives more breaks to the poor. At a news conference, Warner hailed the decision by Moody's as a sign that he and lawmakers did the right thing.
"Like any family or business, we value our good credit," Warner said. "We have now restored Virginia's balance sheet to good standing."
Sen. John H. Chichester (R-Stafford), the chairman of the Senate Finance Committee, said he was "elated" by the news. Chichester, who had proposed an even larger tax increase than Warner had, said the state needs to continue its vigilance against overspending in the future.
"If we had done nothing, I'm convinced we would be at a double-A rating now," Chichester said. "Now, it depends on how we conduct ourselves. We have to closely watch our debt."
Lawmakers who opposed tax increases said Thursday that they were pleased by the Moody's action. But they said the action was primarily the result of the state's improving economy, which is likely to create a surplus of several hundred million dollars by the end of the financial year June 30.
House Speaker William J. Howell (R-Stafford), who led the effort to defeat higher taxes, said Thursday he believes the growth in the economy and the state's willingness to contribute to its rainy-day fund were the most important factors to Moody's.
Howell noted that Michigan and North Carolina lost their AAA bond ratings after raising taxes. He said Virginia might have suffered the same fate if the economy were not improving: "Would we have kept the AAA rating without a tax increase? I kind of think so."
House Majority Leader H. Morgan Griffith (R-Salem) said he believes "the improving economy helped a lot; 22 percent growth in back-to-back months is pretty impressive."
And Prince William Del. Robert G. Marshall (R), an ardent anti-tax lawmaker, criticized Moody's, saying the analysts at the firm "are acting like politicians with a liberal agenda rather than bankers." He added, "Virginia should be run by Virginians, not Wall Street."
Told of the comment, Warner said, "The absurdity of that statement ought to stand on its own."
Virginia's reputation on Wall Street became a key factor in the debate over taxes when, on Sept. 3, Moody's placed the state on its "watch list," alerting investors that it was considering a downgrade of the state's credit.
Moody's is one of three private firms to rate the quality of government bonds. Virginia has about $4 billion in outstanding debt that might have been affected by the change in a credit rating.
Warner used the Moody's threat throughout his six-month effort to persuade reluctant lawmakers to raise taxes. The tactic was effective, political analysts said, because no one in either party wanted to be blamed for losing what had become the financial equivalent of the Good Housekeeping Seal of Approval.
In February, during the height of the tax debate in the General Assembly, the state's chief investment adviser told a joint meeting of the legislature's money committees that a failure to act could lead to a "catastrophic" blow to the state's financial reputation.
"Basically, the ball is in your court," Steven J. Kantor told the lawmakers at the Feb. 11 meeting. "I don't think it will be possible to maintain the rating if you ignore your infrastructure."
Several Republican delegates viewed the focus on the state's bond rating as a tactic used by Warner and Chichester to keep up the pressure for a tax increase. They noted that Kantor also said Virginia could have restored its rating by cutting services instead of raising taxes.
"I remain unpersuaded of the timing, the scope, the magnitude and the necessity of raising taxes by $1 billion," said Del. William R. Janis (R-Goochland). The bond rating "was used to create a crisis mentality."
But others hailed the Moody's decision. Alexandria Del. Brian J. Moran, chairman of the House Democratic Caucus, said the action serves as vindication for the governor and for lawmakers who voted in favor of the tax package.
"The rescue of Virginia's AAA bond rating is proof positive that the budget and tax reform plans passed by House Democrats were the right steps to keep Virginia moving forward," he said.