Nov 30 - Fitch Ratings has assigned an 'AA+' rating to the following
Commonwealth of Massachusetts general obligation (GO) bonds:
--$230,540,000 GO refunding bonds (SIFMA index bonds) 2012 series B;
--$150,000,000 GO bonds consolidated loan of 2012, series D.
The bonds are scheduled to sell through negotiation on Dec. 5, 2012.
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.
General obligations of the Commonwealth, to which its full faith and credit are
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
--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.
Massachusetts' current financial position has stabilized following a period of
steep decline in the recession. Strong revenue performance 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. The balance grew further to $1.65 billion in fiscal 2012, which
ended on June 30, despite more modest revenue growth. Although a draw on the
fund is included in the budget for the current fiscal year 2013, reserve funding
is expected to remain solid at $1.4 billion.
Through October 2012, fiscal 2013 revenues are $256 million below budget
estimates, with underperformance in all major revenue sources. The revenue
estimate will be updated in January 2013 and the Commonwealth has been preparing
for a likely reduction in the forecast. Overall, though substantial risk remains
in the economic and revenue environment in Massachusetts, as in most states,
Fitch believes that the Commonwealth retains significant flexibility to address
budget underperformance and has repeatedly demonstrated its commitment to do so.
The budget for fiscal 2012 addressed a large budget gap that reflected the
phase-out of federal stimulus funds primarily through spending control,
particularly in the area of health care. Savings were achieved and revenues came
in slightly above upwardly revised estimates. Recovery continued, albeit at a
more modest pace than the prior year, with 4% baseline growth in personal income
tax revenues, a 4.7% rise in sales tax revenues, and a 3.5% overall baseline
increase in tax collections compared to 9% year-over-year growth in fiscal 2011.
The enacted budget for fiscal 2013 again relied on spending control to maintain
balance. The budget assumes baseline tax revenue growth of 5.4% over fiscal
2012, while actual results through October show growth of 1.1%.
Strong fiscal 2011 revenue performance triggered an automatic drop in the
state's flat income tax rate, from 5.3% to 5.25% effective Jan. 1, 2012,
pursuant to a previously deferred tax-rate cut. The Commonwealth estimates the
impact of the change at only approximately $55 million in fiscal 2012, rising to
about $115 million in fiscal 2013. Another drop for 2013, to 5.2%, could be
triggered based on recent results, which would have a similarly sized effect on
the fiscal 2013 and 2014 budgets. Although up to three regional resort casinos
and one slot facility have been authorized, much of the revenue is expected to
go to local governments and there is no related money assumed in the
Commonwealth's fiscal 2013 budget.
Massachusetts has consistently taken timely action to ensure budget balance in
recent downturns while maintaining some level of reserves. This is important
given the nature of the Commonwealth's revenue system, which quickly reflects
changing economic conditions. 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. The budget for fiscal 2010 included a
25% increase in the Commonwealth's sales tax rate (to 6.25%) and other revenue
measures totaling about $1 billion. Fiscal 2010 taxes were down 3.2% (baseline)
versus fiscal 2009.
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, with excesses dedicated to reserve funding.
A similar change requires one-time judgments and settlement payments in excess
of $10 million be deposited in the stabilization fund; the fund benefited from
an unusually high $375 million of such revenue in fiscal 2012. Along the same
lines, the Commonwealth has developed a long-term fiscal policy framework
focused on budget sustainability.
Massachusetts has a fundamentally strong and wealthy economy. At 129% of the
U.S. average, the Commonwealth's personal income per capita is the second
highest of the states. After experiencing among the steepest employment drops in
the country from 2002-2004, the Commonwealth's performance in the recent
recession was significantly better than the national experience. 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, with year-over-year growth of 0.6% in
Massachusetts equaling about half the increase for the nation, and was up 1.3%
year-over-year in October 2012, in line with the nation. Massachusetts'
unemployment rate of 6.6% for October 2012 was 84% of the U.S. level.
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, and
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 to remain high.
The Commonwealth is responsible for the pension benefits of not only
Commonwealth employees but also teachers statewide. To avoid a large increase in
the annual contribution for pensions in the fiscal 2012 budget, the schedule for
amortizing the unfunded liability was extended from 2025 to 2040. The
Commonwealth has undertaken some pension reforms and projects manageable growth
in pension funding requirements going forward.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's report
'Tax-Supported Rating Criteria', this action was additionally informed by
information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria', Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria