Moody’s warns of possible Washington credit downgrade over budget reserves, raising borrowing-cost concerns

Moody’s, one of the three biggest credit rating agencies, is warning it could downgrade Washington’s credit rating. The agency cited the state’s repeated use of reserve funds, including the rainy-day fund, to balance recent budgets.

A downgrade would make it more expensive for Washington to borrow money. The state issues roughly $4 billion in bonds each year, according to The Washington State Standard. Even a one-step drop to an “Aa1” rating could add an estimated $60 million annually in debt costs, based on projections from the state treasurer’s office.

State lawmakers have tapped the rainy-day fund and other accounts in recent budget cycles, a move analysts often view as a short-term fix rather than a long-term solution.

The issue is further complicated by uncertainty around a proposed tax on high-income earners. Jamie Pedersen has called the so-called “millionaire’s tax” a major win for Democrats.

“It helps right our budget,” Pedersen explained on TVW the day the latest legislative session wrapped. “It also helps by creating some more affordability for working families in the state.”

‘Millionaire’s tax’ could help balance state budget and bolster Washington credit rating

The new tax is expected to generate about $3 billion per year starting in 2029 and was part of the justification for using roughly $1.2 billion in reserve funds to balance the latest budget.

But the tax now faces a legal challenge. Former Washington Supreme Court Justice Phil Talmadge, who is involved in the lawsuit, argued an income tax that is not uniform would violate the state constitution unless voters approve a change. If the courts strike down the tax, it could worsen the state’s long-term fiscal outlook.

“Case after case after case where this issue has come up, saying graduated net income tax … can’t do it,” Talmadge explained recently on “The Gee and Ursula Show” on KIRO Newsradio. “If you want to do a one percent across-the-board income tax, yeah, you can do it.”

Meanwhile, The Seattle Times reported Washington ranks last in the nation in the percentage of financial reserves it maintains relative to spending, adding to concerns about financial stability.

Despite the warning, Moody’s said Washington’s economy remains strong, helping it maintain its current top credit rating for now.

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