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The U.S. Capitol just after the House voted to pass debt legislation on Capitol Hill in Washington. Credit rating agency Standard & Poor's says it has downgraded the United States' credit rating for the first time in the history of the ratings. The credit agency said late Friday, Aug. 5, 2011 that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation.

NASHVILLE - The decision by Standard & Poor's to downgrade the U.S. government's credit rating could affect future borrowing for states like Tennessee, which depend heavily on federal spending, experts say.

One such expert is Eileen Norcross, a senior research fellow at George Mason University's Mercatus Center in Virginia.

"State and local governments that are otherwise doing well, but are carrying the risk of a lot of federal projects on their balance sheets, may find it more expensive to borrow," she said.

The credit rating agency lowered the U.S. triple-A credit rating to "AA+," citing disappointment with the debt-ceiling deal Congress approved last week.

The agreement calls for about $2 trillion in deficit reduction over the next decade. S&P analysts had called for $4 trillion in deficit reduction and expressed concern over divisive politics in Washington, D.C.

Even before Friday's action, Tennessee officials were preparing to travel to New York to defend the state's triple-A credit rating with analysts from Moody's Investors Service, another major rating company.

Moody's on Thursday reaffirmed triple-A ratings for Tennessee and four other states it had put on a credit watch for potential downgrades if a federal default occurred.

But the ratings agency also slapped Tennessee, South Carolina, Virginia, Maryland and New Mexico with "negative" outlooks because of the volatile situation in Washington.

In an interview Friday before Standard & Poor's move, Tennessee Treasurer David Lillard expressed frustration over Moody's declaration of a "negative outlook" for Tennessee. The move likely signals another credit rating review within 90 days, he said.

"It means we still need to talk to Moody's."

In an e-mail Saturday, Lillard said he doesn't think S&P's action should hurt Tennessee's rating.

"First, Tennessee is rated AA+ by S&P with a positive outlook," he said. "Tennessee has excellent fiscal discipline and has a low amount of debt. The United States government has neither of these characteristics."

Moody's analysts cited concerns over Tennessee state government's reliance on federal funding, higher-than-average federal spending on procurement contracts, a higher-than-average percentage of federal workers and several other issues.

Tennessee-based federal contractors were paid $10.2 billion, according to the U.S. Census Bureau's Consolidated Federal Funds Report for fiscal 2009. That put the state at No. 15 among the 50 states.

A Tax Foundation study of 2005 federal spending showed Tennessee got $1.27 back from Uncle Sam for every tax dollar it sent to Washington. The federal stimulus boosted the return even more.

But Lillard said the state has demonstrated its willingness to cut spending when necessary.

And while Moody's worried whether the state could convert its short-term commercial paper debt into long-term bonds in a crunch, Lillard said that debt is relatively low compared to the state's $30.8 billion budget.

If needed, he said, the state could borrow from its retirement system, but he doesn't expect that to happen.

Lillard also noted that Tennessee borrows little money compared to other states. Moreover, he said, Moody's hasn't yet reduced the U.S. government's credit rating and shouldn't cut states' either.

Sandi Thompson, assistant director of the Office of State and Local Finance in the Tennessee comptroller's office, said Tennessee has $284 million in short-term commercial paper and a $1.67 billion in fixed, long-term debt.

This year, state lawmakers authorized $529 million more in bonds for projects, including $34.6 million for Wacker Chemical's Bradley County plant.

Senate Finance Committee Chairman Randy McNally, R-Oak Ridge, said Saturday the impact of S&P's action could affect Tennessee.

"And part of that was because in Tennessee's case we have a large number of federal employees," McNally said. "We have an above-average percentage of the population that's on TennCare."

TennCare is the state's version of Medicaid, a state and federally funded health care program for the poor. It covers an estimated 1.2 million people.

This year the state is spending $8.9 billion on the program, which depends on $5.8 billion in federal matching funds.

The National Association of State Budget Officers ranked Tennessee 12th among states in terms of total state Medicaid expenditures for fiscal 2009.

In an interview last week before Congress passed debt-ceiling legislation, Moody's analyst Nick Samuels said the agency's perspective is whether a state could have a higher credit rating than the U.S.

"We're suggesting that globally there are very few circumstance around the world where subsovereigns [governments below the national level] have higher ratings than their parent, largely because the parent creates the economic and financial environment in which that entity exists," he said.

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