The bull on the plaza 23 floors below Richard P. Larkin's office is looking a bit tarnished these days. The statue, outside the Standard & Poor's Corp. building near the south end of Broadway in Manhattan, is an enormous bronze idol, a tribute to the good times on Wall Street, now fading fast.
H. Louis Stettler III, Maryland's chief deputy treasurer, probably wasn't worried about the complexion of the bull when he visited Mr. Larkin in late August. He was more concerned with the possible tarnish on Maryland's fiscal reputation. His visit to Mr. Larkin, managing director for Standard & Poor's municipal finance department, came two days before Gov. William Donald Schaefer announced to the public that the state was projecting a $148.3 million budget shortfall.
Mr. Stettler wanted to convince Mr. Larkin and his counterparts at Moody's Investors Service Inc. and Fitch Investors Service Inc. -- George W. Leung and Claire G. Cohen -- that the shortfall was nothing to worry about and that Governor Schaefer had a plan to handle it.
At stake was the state's triple-A bond rating, which Maryland shares with only eight to 10 others (depending on which rating system is used). The rating is a measure of creditworthiness, pure and simple. The lower the rating, the less likely it is that a bond issuer will repay all its debts, in the three agencies' opinions, and the higher the interest rate the issuer must pay to its bondholders.
Although being downgraded from triple-A to double-A would cost the state millions of dollars in interest each year, just as important to state officials would be the loss of prestige. "That triple-A bond rating is an indicator of the financial stability of the state," said J. Randall Evans, secretary of economic and employment development. It's a tool he uses to woo businesses to Maryland.
"I think that the triple-A bond rating is more important from the symbolism of financial strength than it is from a strictly monetary point of view," he said. "It's a symbol of a well-managed state government."
Mr. Stettler's visit was a courtesy intended to keep the lines of communication open between Maryland and the bond rating houses. It's one of the reasons the state has remained in favor in the municipal bond markets for as long as anyone can remember.
But the estimate of the shortfall has grown, from the initial $148 million in August to as much as $322 million, according to William S. Ratchford II, director of the Department of Fiscal Services, who testified before a legislative panel late last month. The Schaefer administration disputes that estimate, but some say that if Christmas retail sales are as weak as current indications, the shortfall could become much greater because of the decline in sales taxes.
Even in a worst-case scenario of, say, $400 million to $500 million, the shortfall would represent only 3.5 percent to 4.3 percent of Maryland's $11.5 billion budget. But the numbers already are higher than the preliminary $127 million shortfall, on a $5.5 billion budget, that Gov. Harry Hughes announced in fiscal 1981 during the last major recession. By cutting spending, starting an instant lottery, raiding the Transportation Trust Fund and raising some taxes, Mr. Hughes was able to end those years with slight surpluses. In fact, in modern times Maryland has never ended the year with a deficit.
Mr. Schaefer's plan, as Mr. Stettler explained to the New York analysts, involves cost cuts, between 1 percent and 6 percent, from every state agency; a freeze in hiring and promotions; no more car or truck purchases; no more out-of-state travel, and beefed up tax audit and collection efforts. Mr. Schaefer has vowed not to raise taxes to bridge the budget gap, but more austerity measures are expected soon.
The bond rating analysts took the news in stride. "You can't be surprised that revenues are coming in below expectations in Maryland," said Ms. Cohen, of Fitch, "because they're also coming in below expectations in Virginia and Georgia," and most of the northeastern states.
"There's a lot of history of good financial management in addressing problems like this," Mr. Larkin said. "That's why we're not panicking."
After New York City's bond default in 1975, Maryland was one of the first states to adopt generally accepted accounting principles and to issue a detailed offering prospectus for its bond issues in the late 1970s. It was the second state to receive the Certificate of Achievement for Excellence in Financial Reporting from the Government Finance Officers Association.
It's true that Maryland's per capita debt level is the highest of the triple-A states, and well above the average of all states, primarily because of Gov. Marvin Mandel's decision in 1972 to launch a $1.2 billion school construction program. But that level has declined steadily, if slowly. "Maryland has had a long history of sound financial management," said Mr. Leung of Moody's, "as well as a resilient and relatively stable economy."