Fitch rates Massachusetts GOs AA-plus
NEW YORK, December 13 (Fitch) Fitch Ratings has assigned an 'AA+' rating to the following Commonwealth of Massachusetts general obligation (GO) bonds: --$525 million consolidated loan of 2014, series A. The bonds are scheduled to sell through competitive bid on Dec. 17, 2013. In addition, Fitch affirms the following ratings: --Approximately $19 billion of outstanding Commonwealth GO and Commonwealth guaranteed bonds at 'AA+'. The Rating Outlook is Stable. SECURITY General obligations of the Commonwealth, to which its full faith and credit are pledged. KEY RATING DRIVERS --STRONG AND WEALTHY ECONOMY: Massachusetts has a broad and diverse economy with the second-highest personal income per capita in the nation. --PRUDENT FINANCIAL MANAGEMENT: The Commonwealth has benefited from conservative budgeting and sound financial practices over time. A limitation on the use of capital gains-related tax revenue has reduced the volatility of economically sensitive revenues in the budget, and the Commonwealth has shown a commitment to reserve funding. --COMPARATIVELY HIGH LIABILITY BURDEN: Massachusetts' debt levels are high for a U.S. state government, and Fitch expects them to remain so. This is partially explained by the above-average role played by the Commonwealth in relation to local levels of government when compared to most other states. In addition, the Commonwealth is responsible for the pension benefits of not only Commonwealth employees but also teachers statewide, contributing to a combined burden of debt and pensions that is also well above the median for U.S. states rated by Fitch. RATING SENSITIVITIES The rating is sensitive to shifts in fundamental credit characteristics including the state's commitment to strong financial management practices. CREDIT PROFILE Massachusetts' 'AA+' GO rating reflects considerable economic resources and a record of prudent financial management. Credit strengths are tempered by a comparatively heavy debt burden that Fitch expects to remain high. The Stable Outlook reflects the expectation that the Commonwealth will continue to act as needed to ensure budget balance and maintain an adequate budgeted reserve position. FINANCES AND MANAGEMENT Massachusetts' financial position has stabilized in recent years following a period of steep revenue decline in the recession. Fiscal 2013 revenue performance was solid, benefitting from the acceleration of income into calendar 2012 that took place in anticipation of federal tax increases. Revenues from income tax estimated payments were up 15.4% year-over-year and final returns 24.7%. Baseline overall tax revenue growth of 5.6% also reflected growth of 3.5% in personal income tax withholding receipts and 2.4% in sales tax revenue. The year ended on June 30 with a $1.55 billion balance in the stabilization fund, down a relatively small $95 million from the prior year. Although the acceleration of income into the prior year introduced uncertainty into the forecast for the current fiscal 2014, tax revenues through November are $359 million above estimates, with overperformance in all categories. Income tax withholding receipts are up 5.3% (baseline), the sales and use tax 6.3%, and overall tax collections 8.3%. Based on results to date, revenues are expected to meet or exceed budget forecasts despite the retroactive repeal of a computer and software services tax that was included in the enacted budget (estimated impact of $161 million) and the reduction of the income tax rate to 5.2% from 5.25% effective Jan. 1, 2014 that was triggered by recent revenue growth (estimated impact of $65 million). Fitch believes that the Commonwealth retains significant flexibility to address any budget underperformance and has repeatedly demonstrated its commitment to do so. Strong revenue results in fiscal 2011, which saw 9.3% year-over-year baseline tax revenue growth, allowed for an increase in the stabilization fund balance to $1.4 billion, up from $670 million at the end of fiscal 2010. Recovery continued in fiscal 2012, albeit at a more modest pace, with a 3.5% baseline increase in tax collections; the stabilization fund balance grew further to $1.65 billion. In fiscal 2013, scheduled draws were expected to lower reserve funding to $1.3 billion at year-end. However, the stabilization fund ended the year with a higher $1.55 billion balance. This is budgeted to drop to a still solid $1.4 billion at the end of the current fiscal 2014. Massachusetts' demonstrated commitment to taking timely action to ensure budget balance in recent downturns while maintaining some level of reserves is important given the nature of the Commonwealth's revenue system, which quickly reflects changing economic conditions. For example, with economic deterioration, tax revenue forecasts were reduced significantly over the course of fiscal 2009, from $21.4 billion in the enacted budget to actual results of $18.3 billion, and the year ended down 13% (baseline) compared to fiscal 2008. In addition to solid ongoing budget management, the Commonwealth has proactively taken steps to reduce the impact of volatile revenues on its budget in recent years. The variability and unpredictability of capital gains-related tax revenue has been a key factor in volatility over time. In response, the fiscal 2011 enacted budget included a new mechanism for budgeting capital gains-related tax revenue that limits the amount of such revenue that can be included in the Commonwealth's budget to $1 billion (adjusted annually by a U.S. GDP growth-based formula starting in fiscal 2014), with excesses dedicated to reserve funding (90%) and retiree benefit obligations (10%). Capital gains tax revenues totaled $1.47 billion in fiscal 2013, and this mechanism is a key reason that the reserve funding level remained largely unchanged for the year. A similar change requires one-time judgments and settlement payments in excess of $10 million to be deposited in the stabilization fund. The fund benefited from an unusually high $375 million of such revenue in fiscal 2012, the fiscal 2013 figure was $32 million, and through November of this year one-time judgments and settlement payments in excess of $10 million total $159 million. In another example of sound fiscal management, the Commonwealth has developed a long-term fiscal policy framework focused on budget sustainability. ECONOMY Massachusetts has a fundamentally strong and wealthy economy. Institutions of higher education and health care are significant and lend stability, in addition to supporting development and innovation in other areas. At 128% of the U.S. average, the Commonwealth's personal income per capita is the second highest of the states. The Commonwealth's economic performance in the recent recession was significantly better than the national experience, in contrast to 2002-2004 when Massachusetts experienced among the steepest employment drops in the country. Employment losses in 2009 were less severe than those of the U.S. (3.3% versus 4.4%), and Commonwealth employment rose 0.3% in 2010 while U.S. employment fell 0.7%. Employment continued to grow in 2011 (1.2%) and 2012 (1.4%) at a pace generally in line with the national trend. Year-over-year growth of 1.6% in October 2013 was just below 1.7% for the nation. Massachusetts' unemployment rate of 7.2% for October 2013, although up from 6.7% in October 2012, remained just below the 7.3% rate for the U.S. DEBT AND OTHER LONG-TERM LIABILITIES The Commonwealth's net tax-supported debt equals a comparatively high 10% of personal income, including sales tax obligations of the Massachusetts Bay Transportation Authority and the Massachusetts School Building Authority, as well as contract assistance commitments to the Massachusetts Department of Transportation. The comparatively high debt levels are partially explained by the Commonwealth's above-average role in relation to local levels of government when compared to most other states. GO debt continues to represent the majority of outstanding debt. Fitch expects debt levels to remain high. The Commonwealth is responsible for the pension benefits of not only Commonwealth employees but also teachers statewide. Massachusetts has undertaken some pension reforms and projects manageable growth in pension funding requirements going forward.