As bond sale approaches, impact of credit downgrade remains uncertain

by Bryan P. Sears, Maryland Matters
June 9, 2025

State officials — and Maryland taxpayers — will learn in a few days just how much a ding on the state’s prized credit rating will cost, if anything.

Maryland officials plan to offer roughly $1.7 billion in bonds for sale Wednesday, the first since the state lost its treasured triple AAA bond rating last month, when Moody’s downgraded the state to Aa-1.

An Aa-1 rating is still “very, very high,” said David Kass, senior fellow at the Center for Financial Policy at the University of Maryland Robert H. Smith School of Business. “So, the penalty, if there is a penalty, it’s certainly that you don’t want to have mud thrown on you.

“This is certainly a negative. It’s a negative signal for sure,” Kass said. “No one’s proud. No state wants to have their rating downgraded by any agency.”

But it’s a negative that for now carries an uncertain consequence.

The state’s other bond-rating agencies, Fitch and Standard & Poor’s, maintained an AAA rating for Maryland. While experts say the Moody’s downgrade will likely not lead to dramatically higher interest rates on state borrowing, Moody’s action “isn’t a nothing burger.”

“You’re certainly not going to pay lower rates with a Aa-1 bond rating vis-a-vis a AAA bond rating, right? So that part of the spectrum is cut off,” said economist Anirban Basu, president of the Sage Policy Group in Baltimore. “I think the most likely outcome is that you pay slightly more interest than you otherwise would have.”

Basu said the change could add as much as two-tenths of a percentage point to the amount of interest paid by the state. It’s a change that could tack on more than $1 million in interest for each $1 billion borrowed.

“That’s not massive. It’s not as if this is a nonevent, but it’s also not the end of the world,” Basu said.

“You know, a minority of states have a AAA bond rating. I was very proud of Maryland. It was a source of prestige,” he said. “But in terms of actual economic implications, the implications are not massive. We’re going to pay slightly more on our debt, slightly more to construct schools and repair bridges, etc. This is not the end of the world.”

Kass said he expects the top ratings from two other agencies will likely serve as a bulwark against big interest rate increases.

“Standard and Poor’s and Fitch are still AAA with a stable outlook, so I would expect a fairly negligible impact,” Kass said.

The dollar amount on that negligible impact, Kass said, could be about half of what Basu expects. He estimated the state could potentially pay “at most” $50,000 more annually on each $100 million borrowed.

Kass said he believes the actual penalty — if any — could be less.

“Very likely it could be close to zero,” Kass said, pointing to the AAA from the other two agencies.

But Kass said that does not mean Moody’s rating should be ignored.

“The downgrade is certainly not something that you’re proud of. You never want that. No state or issuing agency wants to be downgraded,” he said. “It sends a signal to the market that there may be a problem here. But keep in mind, Aa1 is still considered investment grade.”

For years, events such as the annual state bond sale were watched only by banks, investors and those who are directly involved in the state’s budget and fiscal performance. That changed with last month’s downgrade by Moody’s.

Few were surprised by the downgrade, which Moody’s had been telegraphing for months, but state officials still reacted with anger. The party line argument painted the change in political terms. The downgrade, they said, is the result of President Donald Trump’s (R) focus on draconian budget cuts.

Treasurer Dereck Davis also threatened the state may no longer use Moody’s.

Basu said he understands the political desire to shrug off the downgrade. He said the “Hollywood folks — George Clooney and that crowd — who love Maryland’s governor and think he should be the 2028 Democratic Party nominee, will probably say this is a non-issue.”

“But it’s not a nothing burger. It’s not a non-issue. We lost our universal AAA bond rating,” Basu said. “That didn’t happen under [former Comptroller] Louis Goldstein. That didn’t happen under [former Gov.] William Donald Schaefer. That didn’t happen under a lot of leaders, a lot of stewards of our state’s finances.”

Maryland held the highest credit ratings from three major rating agencies for more than 50 years, one of more than a dozen states that boasted the top ratings from Fitch, Moody’s, and Standard & Poor’s.

Pragmatically, holding the highest ratings from the three major agencies meant Maryland taxpayers paid lower interest rates on money borrowed each year to build schools and other major projects. Politically, the rating was a source of pride for governors and lawmakers. Leaders of both parties could point to the ratings as evidence of strong fiscal management.

Both Basu and Kass agree that it will be difficult for Maryland to regain Moody’s top rating.

“I think it doesn’t happen very often,” said Kass.

On average, as many as three states see their credit rating upgraded each year. In some years, there are no upgrades, Kass said.

“By contrast, downgrades are more common, especially during recessions or fiscal stress,” he said.

Returning to a AAA status will require the state to meet a higher bar.

“It takes time to fix your problem,” he said. “I guess what triggers an upgrade, sustained budget surpluses, economic growth, reduction in debt, pension reform —if that applies — and strong governance. So, let me tell you from my observation: yes, it can happen. It could take years, but it’s infrequent.”

In the meantime, Kass said state officials should focus on a few things including protecting the top ratings from the remaining two agencies

“They (Maryland officials) should probably try to figure out what they need to do. In the case of Maryland balancing their budget, the budget deficit, I assume, is high up on (Moody’s) list,” Kass said.

Basu said he “would love to see … us regain our universal AAA bond status, that some governor would preside over that.” But he said he has concerns about the state’s “economic malaise.”

Moore has promised to focus on growing the state’s economy and reducing the dependence on federal employment and contracting. But Basu said those promises are countered by actions during the 2025 legislative session.

“Look back in 2022 when (Moore) was elected and is speaking about his approach. He was saying all the right things from this economy’s perspective. He was saying, we need to grow the economy,” Basu said. “Look at this legislative session, a massive increase in taxes. It’s not pro-growth.”

Maryland Matters is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Maryland Matters maintains editorial independence. Contact Editor Steve Crane for questions: editor@marylandmatters.org.