Tea Party's Way Puts Haley's South Carolina Among Most to Lose

Photographer: Chris Keane/Getty Images

South Carolina’s above-average proportion of Medicaid spending, and federal procurement contracts that are higher than the average as a percentage of gross state product, exposes it to a U.S. downgrade, Moody’s said in its report. Close

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Photographer: Chris Keane/Getty Images

South Carolina’s above-average proportion of Medicaid spending, and federal procurement contracts that are higher than the average as a percentage of gross state product, exposes it to a U.S. downgrade, Moody’s said in its report.

South Carolina Republican Governor Nikki Haley took the Tea Party line two months ago when speaking about Congressional talks to raise the U.S. debt ceiling.

“The very first thing they need to do is -- is make sure that they stop raising the debt,” she said May 15 on ABC’s “This Week” program.

Now, her state may lose its top credit rating if U.S. legislators can’t agree on raising the debt limit. Moody’s Investors Service placed South Carolina and four other states on review for a rating cut because their reliance on federal spending puts them at risk if the U.S. credit grade is lowered over the debt impasse.

That prompted Haley, a first-term Republican elected in November with Tea Party support, to distance her state from Washington at a public meeting today meant to promote South Carolina to bond-rating analysts, including those from Moody’s.

“There is an absolute stark contrast in where we are going in our financial condition in the state of South Carolina and where the federal government is going,” Haley, 39, said in Columbia, the capital. “While they continue to go somewhat in chaos, we continue to go in a more independent, solid way.”

Other states have gone beyond rhetoric to prepare for a possible U.S. debt default. California borrowed $5.4 billion from Goldman Sachs Group Inc., Wells Fargo & Co. and other banks this week and Maryland postponed $206 million of borrowing because of the potential credit markets will be disrupted.

Resistance to Boehner

Republican House Speaker John Boehner met resistance from his own party today to his proposal to raise the limit. Tea Party-backed members, including presidential candidate Michele Bachmann of Minnesota, expressed concern the plan won’t cut enough spending.

The standoff has sparked concern that the U.S. may default on its obligations and forfeit its AAA mark if an agreement isn’t reached by Aug. 2. If that happens, Moody’s said on July 19, South Carolina, Maryland, Tennessee, New Mexico and Virginia -- all with top credit grades -- may also be cut.

“We’re are all aware of the sabers you rattled over that one,” South Carolina Comptroller General Richard Eckstrom said to Moody’s analysts at today’s meeting. “You named us and we think it was a very timely warning to us. The uncertainty that surrounds what is going on in Washington is a warning that we certainly take to heart.”

South Carolina has contingency plans to reduce spending if federal funds are withheld, including dismissing all but the most essential workers, Eckstrom said.

National Notice

Haley gained national attention last year after defeating three better-financed Republicans in the race for the party’s nomination for governor. The former state representative was helped by endorsements from Sarah Palin, the 2008 Republican vice presidential candidate, and local Tea Party supporters.

Haley went on to beat state Senator Vincent Sheheen, a Camden Democrat, in November, becoming the state’s first female governor and the second Indian-American U.S. governor after Louisiana’s Bobby Jindal, another Republican.

As governor, Haley has met opposition from the Republican- controlled Legislature and officials of her own administration. State Treasurer Curtis Loftis called today’s meeting “an ill- conceived idea” in a telephone interview this week. He didn’t attend.

While Haley pledged to reduce state government, lawmakers overrode most of her vetoes in the fiscal 2012 budget, leaving spending bigger than in 2011. The budget produced by lawmakers was “wasteful, irresponsible and displays a poor sense of priorities,” the South Carolina Policy Council, a nonprofit group that promotes limited government, said June 24.

Reversed Stance

Haley lost credibility among legislators when she vetoed a plan to provide state support for South Carolina’s public- television network, after previously agreeing to the funding, said Scott Huffmon, who teaches politics at Winthrop University in Rock Hill.

Legislators overrode her veto and greeted Republican leader Kenny Bingham’s criticism of the governor for “wasting this body’s time” with a standing ovation.

South Carolina’s above-average proportion of Medicaid spending, and federal procurement contracts that are higher than the average as a percentage of gross state product, exposes it to a U.S. downgrade, Moody’s said in its report. It also cited the state’s “relatively high” capital-market risk because its variable-rate debt exceeds the national average.

“South Carolina has a large proportion of people on Medicaid and that’s one part of the state’s profile that makes it appear potentially more vulnerable to a possible deterioration of the federal government’s credit,” Ted Hampton, a Moody’s analyst who helps rate the state’s credit, said by telephone yesterday.

Low Costs

South Carolina’s credit strengths include low costs that have attracted manufacturers, raising requirements to fund its reserves and limits on supplemental spending, Moody’s said in a Feb. 4 report.

A challenge is that the state’s retirement funds held about 69 percent of the assets needed to cover projected liabilities as of July 1, 2009, Moody’s said. Plans with 80 percent or more of needed assets are considered adequately funded.

The state expects the funded ratio to rise to 85 percent to 90 percent over the next decade, Bill Blume, director of the South Carolina Retirement Systems, said at today’s meeting.

South Carolina tied with Michigan for the nation’s fifth- highest unemployment rate in June at 10.5 percent, above the national average of 9.2 percent. The southern state gained 17,200 jobs from June 2010, while losing 112,500 since 2008, according to Labor Department data compiled by Bloomberg.

Lacking Opportunities

While Haley has heralded new business announcements by retailer Wal-Mart Stores Inc. (WMT), tiremaker Bridgestone Corp. (5108), cookware maker Le Creuset and other companies in recent months, the jobless rate remains unusually high, said Frank Hefner, an economics professor at the College of Charleston. The economies of Charleston and Greenville-Spartanburg are robust, with most other regions lacking growth opportunities, he said.

“The governor will point out all of the job announcements, but those aren’t jobs,” Hefner said. “They are companies saying we plan to hire so many people, but there is very little accountability on how many they have really hired.”

To contact the reporter on this story: David Mildenberg in Austin, Texas, at dmildenberg@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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