WASHINGTON —A leading bond rating agency threatened Tuesday to downgrade Maryland's gold-plated credit rating because of the protracted debate over raising the nation's $14.3 trillion debt ceiling.
Moody's Investors Service announced it would review "for possible downgrade" the credit ratings of five states, including Maryland, that could be hit particularly hard if Congress fails to raise the nation's debt limit by the Aug. 2 deadline and defaults on its financial obligations.
A downgrade would have a significant impact on interest rates. The Moody's warning came days before Maryland plans to borrow $718 million for school construction and to refinance old debt.
Maryland State Treasurer Nancy K. Kopp, who will oversee that bond sale, said she expects it to take place as scheduled. But Kopp reiterated that state officials will keep a close eye on interest rates and could back out of the sale, which begins Friday, if necessary.
"We are a strong state … but there is no doubt that on a macroeconomic level we are impacted by serious problems in the federal government," Kopp said Tuesday. "I think, in the end, they will come to the conclusion that we will stand on our own legs."
With an Aug. 2 deadline approaching, lawmakers in both parties are wrestling with how to increase the debt limit while minimizing political fallout. House Republicans passed a measure that would raise the limit in tandem with significant budget cuts and a constitutional amendment to require a balanced budget.
The state's two Republicans in Washington, Rep. Roscoe G. Bartlett of Western Maryland and Rep. Andy Harris of Baltimore, both voted in favor of the legislation. The state's six Democrats opposed it.
The measure, which would cut spending to levels not seen since 1966, has little to no chance in the Democratic-controlled Senate.
Senate leaders are working on a separate proposal that would allow the White House to raise the debt limit without the express permission of Congress.
And as negotiations headed toward a critical stage, the White House announced that President Barack Obama will travel to College Park on Friday to speak at a town hall meeting at the University of Maryland. A university spokesman said a limited number of tickets would be available to students.
Little substantive progress has been made on the debt limit despite weeks of negotiations on Capitol Hill and at the White House. Democrats remain reluctant to make significant cuts to entitlement programs such as Medicare without new taxes. Republicans remained steadfastly opposed to any new taxes.
"Clearly, we are running out of time," said Rep. Steny Hoyer of Southern Maryland, the second-highest ranking Democrat in the House. "This crisis, of course, everyone in the Congress has known that it was going to come and would arrive."
Moody's announcement was directed at states with close ties to the federal government, such as those with a high concentration of federal employees. Any change to the state's credit rating would follow a downgrading the nation's rating, according to Moody's.
In addition to Maryland, New Mexico, South Carolina, Tennessee and Virginia were included in the announcement.
A spokeswoman for Democratic Gov. Martin O'Malley said Moody's decision to take another look at the state's AAA rating made sense because of Maryland's proximity to Washington. But she stressed that the rating had not changed and the state remains on a strong financial footing.
"We have made really smart decisions over the last several years to keep our spending in line with our revenues," spokeswoman Raquel Guillory said.
A spokeswoman for Sen. Benjamin L. Cardin said the threat by Moody's was yet another reason why a default is not an option for the country.
The Maryland Democrat "has said repeatedly that our deficits are not sustainable, but the responsible course of action is to increase the debt ceiling and develop a credible, balanced plan that will enable us to manage our deficits," spokeswoman Susan Walitsky said.