Cowell: NC credit still strong, but some local ratings under review

State Treasurer Janet Cowell says the US credit downgrade shouldn’t have much effect on North Carolina’s ability to borrow money. But that may not be the case for some local governmental units.

Cowell says NC has a triple-A bond rating, the highest possible. And so far, she says ratings agencies have given her no indication they’re reconsidering it. “We still have very good access to capital markets, so we feel good about that.”

“Now that said, I think obviously, there will be ripple effects,” she added, mentioning today’s downgrades to federal mortgage clearinghouses Fannie Mae and Freddie Mac. And if the markets keep spiraling downward, she said, it may be harder for any borrower to access credit.

“But I feel like overall, North Carolina will fare as well as anyone, both at the state and local level, because we do have strong oversight of our local government and state government. We have very conservative debt policies,” Cowell said.

“We have 2% of our state GDP in debt, versus high 70s for the United States government. So we have a very different fiscal profile.”

Still, Cowell said, since Friday night, seven local governmental units have been told by Moody’s that their bond ratings would be reviewed immediately.

Cowell said those seven include the cities of Durham, Winston-Salem, and Greensboro, and the counties of Wake, Mecklenburg, Guilford, and New Hanover. “Obviously, those are all strongly managed units, all triple-A units,” Cowell said.  

According to Cowell, the reviews could be prompted by a number of factors, including the governmental unit’s dependence on federal funding. If that funding were to fail, it could put some local governments at risk for default, too. “Counties tend to be a little more dependent because they have more social service programs,” Cowell explained.

Variable-rate debt could be another factor, said Cowell. Statewide, local government units hold an average of less than 5% variable-rate debt. The rest is fixed-rate, so it’s not vulnerable to market swings. But some local units may have more variable debt on their balance sheets, which could put them at risk if the US downgrade pushes up interest rates overall. She said could also be factors.

Cowell said her office will assist the seven units through the review process, which she expects to take a few weeks. She’s confident they’ll come out well. “All of these units are very strong, and all of this is only happening because of the US downgrade,” she said.

Cowell said the wild swings in the stock market have likely cost the state pension fund tens of millions or even hundreds of millions of dollars. But she stressed that pension fund members shouldn’t be too concerned by short-term volatility.

“A large percentage of the fund is in long-term fixed-income things like real estate or private equity that are valued every quarter,” and are far less vulnerable to market swings, she explained. “We’re investing for the long term, so we’ll survive some of that volatility. We’ve positioned and diversified as much as possible, so we don’t have all our eggs in one basket.”

Overall, Cowell said, the state’s in pretty good shape to get through this latest crisis with minimal effect. “While there’s a lot of uncertainties, we have a strong bond rating, and most of our debt is fixed rate, so you’re not going to see huge changes in your local or state budget because of this.”