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ECONOMIC ANALYSIS: Why Indiana's AAA bond rating should please all of us

August 11, 2008

Sometimes, obscure economic issues matter a great deal to our economic well-being. One example is the news that Indiana's bond rankings have risen to the highest level, the highly coveted AAA ranking from Standard and Poor's. Why that happened, what it means and why it is important should matter to Hoosiers.

To begin with, all states, like virtually all households, borrow money to ease cash flow issues. States also borrow money to make infrastructure investments. The government essentially takes out a mortgage on big durable things like roads and bridges. The only meaningful difference is that governments borrow their money not from a bank, savings and loan or credit union, but from a bond market.

Bond markets house the least dashing and romantic figures in all the world of economics and finance. They are dull figures, indeed. Yet bond markets are the first to signal economic changes. They are the canary in the coal mine, for the good reason that they hold long-term securities backed only by the promise to pay (and perhaps an insurance policy). So markets for state and municipal bonds tell the story of a region's economy far more accurately than any advertising campaign. This is why Hoosiers should be rejoicing at the news that our state has received a AAA ranking.

The bond rankings for the state bond market are based on a large number of factors. One is the condition of the economy in the broader region (Great Lakes and Midwest). Because our bordering states are languishing through economic conditions ranked as merely poor (like Kentucky or Ohio) to fantastically dismal (Michigan), I would not have predicted Indiana's bond rankings would have risen.

It is clear the persistent drum roll of good economic news coming from Indiana was enough to persuade bond-rating agencies to look closely at the state. They clearly liked what they found in Indiana. Our nationally recognized property tax reform, the robust budget surplus (one of the few in the nation), and the dogged resilience of our state's economy all factored into the new bond ratings.

However, I think the dark horse in the bond ratings is the financing deal the state struck with the Indiana Toll Road. Publicprivate partnerships are just about the only way to improve transportation infrastructure, and Indiana couldn't have picked a better moment to do so.

But our newly minted high-class bond ranking doesn't just give us peace of mind about the state of the state. Several studies suggest we will save more than 1/10th of a percentage point in borrowing costs. This means a savings to taxpayers of at least $500 million over the next 30 years. It could be several times this amount.

The new bond rating is equivalent to putting at least an additional $200 back into each household's pockets. Makes you wish we could do a few more toll road deals, doesn't it?



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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