Here’s what goes into keeping Delaware’s AAA ratings

The way Delaware handles its budgets, a growing population and efforts to diversify the state economy all help the state continue to earn a AAA bond rating, which means the state pays less when it wants to borrow money.

For example: The state received bids last week for its upcoming sale of $380 million of triple-A rated General Obligation Bonds and it will pay little more than 1% interest on those bonds –  even though the Federal Reserve has raised its benchmark interest rate more than 4% since Delaware last issued bonds.

That rating also allowed the state to have an additional $1 million in savings by refinancing $34 million of existing debt, said Secretary of Finance Rick Geisenberger in a press release from Gov. John Carney’s office.

Ratings are based on criteria that include the state’s financial performance and management, overall debt and approach to long-term issues.

The highest ratings, Aaa/AAA, are granted to states that are well managed and prepared to pay their debts during periods of recession or fiscal stress.

Geisenberger told Delaware LIVE that the rating agencies  — Moody’s, S&P Global Ratings, and FitchRatings — always comment on state rules that include limiting the amount of revenue that can be budgeted, putting money into a Rainy Day Fund and also into a Budget Stabilization Fund.

But those ratings also look at state mechanisms such as the Delaware Economic and Financial Advisory Council. It meets five times a year to look at state revenues and expenditures so the General Assembly and governor have an idea about what’s coming and can adjust.

Because of that, Delaware was able to use some of the Budget Stabilization Fund monies in 2020 after COVID-19 hit revenues for the Fiscal Year 2021 budget.

“A general assembly and governor that have collaborated now over really 34 years to keep spending reasonably under control … are the kinds of things they tend to talk about in these rating agency reports,” Geisenberger said.

Carney created the Budget Stabilization Fund by executive order in 1918 after Republicans and others called for one, but weren’t able to get it through the General Assembly.

Once the COVID-19 pandemic kicked into high gear, federal COVID-19 money from the Trump and Biden administrations, high real estate transfer tax payments and unexpectedly high personal income payments have meant three years of $1 billion revenue surpluses.

That’s allowed the state to put money back into the stabilization fund and to pay for a lot of one-time projects.

Rating agencies “comment on the state’s reserves that we’ve been able to build as a result of responsible budgeting certainly over the last five or six years,” Geisenberger said.

 “We’ve been adhering to a benchmark level of spending growth in the operating budget and so, at least nominally, our budgetary reserves are at the highest level they’ve been in a long time.”

Ratings comments

 FitchRatings stated that Delaware’s ratings are “supported by proactive management and institutionalized protections designed to ensure surplus operations.”  

 S&P’s report commented, “The State limits tax-supported debt…and adheres to clearly defined affordability parameters and rapid amortization.” 

 Moody’s reported a stable outlook for their rating, recognizing the “state’s strong reserves and structural governance features” as well as “lower business costs and cost of living relative to neighboring states…will help preserve a sound financial position relative to peers.”

In addition, the state’s population growth is above the U.S. average, Geisenberger said, as people move here from mostly northeast states to work or retire.

The number of residents officially sits at just under 1 million, but is believed to be over 1 million. The numbers climbed each year between 2010 and 2021.

One point Geisenberger has been pointing to for a few years is the cost of the state’s other postemployment benefits, which is largely healthcare and other services for retirees.

If health care costs keep rising as they are now and the state keeps paying as it is now, Delaware’s unfunded liability for health care plans is expected to grow to $31 billion by 2050, he has said.

That’s out of the norm for the size of the population, he said, and can affect the way the state’s financial health is viewed.

It’s one reason that Delaware wanted to move retirees off their longtime generous health plan onto a managed Medicare Advantage plan.

It that had worked, the state would have had only a $3 billion deficit by 2050. 

However, retirees revolted and forced the state to back off and several committees are now looking for middle ground.

RELATED STORY: State retiree health plan extended to June 2024

Geisenberger said the ratings agencies noted that Carney  included a contribution of 1 % of the state budget to the OPEB Trust Fund that helps pay postemployment benefits. Carney has proposed doing that again this year.

“It’s not the be all, end all solution but you know it’s certainly helpful, so that comes across in their comments,” Geisenberger said.

The ratings agencies also scrutinize the makeup of Delaware’s economy, which in the past had been ruled by a single kind of company – chemical or credit card.

“They don’t specifically mention the Delaware Prosperity Partnership and the governor’s economic development efforts, but they do talk about how Delaware continues to work to diversify its economy,” he said.

That includes attracting financial services, biotechnology firms, companies that do lab work and need those facilities, and small manufacturing businesses.

“All of that in the long run is good for the state’s economy to be more diversified and less dependent on single employers,” Geisenberger said.

While Delaware’s economy includes a lot of financial services, Geisenberger said the state has been able to show rating agencies that those jobs include more financial technology, trust banks and other services in addition to credit cards.

Carney said in the press release that every taxpayer he’s ever talked to expects their tax dollars to be used responsibly.

“I’m proud that the State continues to receive the highest marks for management of our finances,” he said. “These triple-A ratings lower costs for taxpayers and sustain our ability to invest in new schools and other critical infrastructure. We’ll continue working hard, with our partners in the General Assembly, to protect taxpayer dollars.”

Rating reports can be found at the Delaware Department of Finance’s website.