Fitch rates Massachusetts GOs AA-plus

Fri Dec 13, 2013 1:45pm EST

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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.
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