Only twelve states have managed to get a coveted AAA bond rating from the country’s bond rating agencies, and North Carolina has recently been confirmed as one of them once again. The rating indicates that people who invest in bonds from the state government to meet all of its financial obligations towards them when the time comes. That reliability comes from a variety of factors, but the biggest contributor is the state’s financial policies. It is vital for everyone in the state to understand this rating because it can have a significant impact on the government’s finances, and it can also have some benefits for individuals who live, work, or invest in North Carolina.
How Bond Ratings Work
A bond rating is similar to a credit rating, but it applies to the state government rather than to an individual. A group of three different credit agencies work together to calculate the score, which measures how likely the government is to make payments on the bonds that it issues once they mature. A government that has a AAA rating, such as North Carolina, is more or less certain to meet all of its obligations. That makes it very attractive to investors who want a safe way to increase their fortune.
How North Carolina Earned its Score
High ratings are rare. North Carolina earned its high rating due to a set of policies which encouraged economic growth and provided funds for emergencies. An emergency fund of approximately 1.8 billion dollars received particular praise during the rating. Governments tend to run into financial problems that could hurt their rating due to unexpected emergencies, but the fund makes it unlikely that the state will suddenly run out of money while it deals with an unexpected problem. The fact that the government could find enough money to put into the fund is also a strong indicators of its financial stability.
Budgeting practices also contributed to the situation. The state managed to make a great deal of progress towards plugging gaps in the budget even during hard financial times. Investors can take that as a sign that the government will adapt and find ways to meet all of its obligations even during the times when it has a little bit of trouble with revenue. That shows that the government is just as secure from relatively long-term, expected downturns as it is from sudden emergencies.
The state’s general economic health is the last piece of the puzzle. North Carolina’s economy has been growing quickly and has even exceeded expectations for the past few years. That growth has also been accelerating, so analysts expect it to continue in the near future. When investors look at that growth, they see evidence that the state is safe from the problems that could cause it to dip into its emergency funds. As long as revenues increase, it is almost certain to meet all of its financial obligations with plenty of money to spare.
Impact on the Government
The high rating is great news for the government of North Carolina. The government can issue bonds as a way to raise money, essentially as a type of loan. Individuals purchase those bonds as a type of investment, and they expect a rate of return that is proportionate to the risk involved in doing so. Since North Carolina has a high bond rating, the investors know that the risk involved in buying a bond is very low. That means that they will be willing to accept low interest rates on the bond. That is a major asset for the government because it means that they can issue bonds to raise money without paying much interest. That can save a lot of money in the long term, which the government can use on other products or return to the taxpayers who originally provided it.
This rating also provides valuable feedback to the state government about the impact of their financial policies. The rating comes from an external organization, so it can pass judgment on the state’s financial situation without worrying about political pressures. That leads to a degree of objectivity that can be valuable. The rating organizations also have a great deal of experience and plenty of researchers, so they can form a fairly accurate assessment of the big picture. Those factors mean that the rating is a great tool for politicians who want to know if they need to change their policies or if they should maintain their current methods. Since the state’s current rating is excellent, the government is likely to stick with the current plan.
Impact on the People
The AAA rating may not seem like it could have a big impact on the average person’s life, but it can have plenty of subtle effects. Entrepreneurs are likely to see the bulk of the impact, especially those that want to expand their businesses. While the rating only applies to the safety of investing in the state’s bonds, it is an excellent sign that investing in the rest of the state is also safe. That will help to drive investors to North Carolina, which should lower the cost of borrowing money for most business owners. That can help to drive general economic growth, which can lead to plenty of opportunities for managers that are willing to take them.
Residents can also take this as a sign that their government won’t be running into financial problems in the near future. That gives the government more opportunities to invest in local projects and to continue supporting parks and other nonessential services. That is not likely to lead to any major lifestyle changes for the average person in North Carolina at the moment, but it does mean that residents can stay hopeful about the future. Ultimately, the AAA rating is a sign that the state’s economic health is in excellent shape, and every person who lives in North Carolina can look forward to the benefits of a healthy economy.