Mass. credit strategy gets nod
S&P, others cite management, financial strength
A report issued by Standard & Poor’s says that Massachusetts is the only state in the nation that is poised to improve its credit rating in the next two years.
Although Massachusetts’ rating currently falls in the bottom half of states, S&P analysts say the state is managing its financial recovery and improving its credit standing better than its counterparts across the country.
The Wall Street credit agency cited the state’s “ongoing progress of improving financial, debt, and management practices’’ as a reason that bond investors should have confidence that Massachusetts is moving in the right direction. The other two credit agencies, Fitch Ratings and Moody’s Investors Service Inc., cited similar strengths in reports issued over the past two weeks, though neither of those agencies changed its rating for Massachusetts.
Even as Massachusetts struggles with budget pressures that are forcing significant cuts to services, the Patrick administration is pointing to the S&P analysis — issued last month — as validation of its budget strategy.
The report, while encouraging, does not mean the state is in a better overall financial position than its peers. Twenty-five states still have an overall better credit rating than Massachusetts, which is one of 18 states that score AA, the third-highest possible rating.
Still, several other states are struggling with much bigger budget holes and fewer options to plug them. New Jersey and Nevada had their credit ratings lowered over the past two months. Arizona, California, Florida, Illinois, Maine, Ohio, and Rhode Island all have a “negative outlook,’’ meaning their ratings may go down in the next one to two years. Oregon is the only state S&P has upgraded this year.
“When you look at the budget climate, generally, and the recessionary impact for most states in terms of their budgets,’’ Massachusetts is performing unusually well at closing its deficit without depleting its rainy day fund, said Robin Prunty, a credit analyst who leads S&P’s state ratings group. “Their economic recovery is underway.’’
Reports from all three agencies also cite the relatively high income levels of Massachusetts residents as a strength in the state’s economy.
S&P has not changed Massachusetts’ rating since 2000, when it bumped it up from AA-.
Wall Street has been reluctant to reward Massachusetts with its highest ratings because the state carries high pension costs and one of the largest debt loads in the nation. State officials attribute that to old infrastructure and a lack of local funding sources to defray the costs of building projects such as bridges and courthouses. (The State House itself has experienced periodic leaks in its aging roof.)
Fitch and Moody’s both gave the state a ratings bump in 2010, but only because the agencies changed the grading scale for state governments in response to the financial crisis.
Jay Gonzalez, Massachusetts’ secretary for administration and finance, said a better credit rating saves taxpayers millions of dollars in borrowing costs when the state issues bonds to build roads and other public works projects.
“It assures business investors that we have a stable fiscal condition and that means predictability for them,’’ he said.
Still, credit analysts and financial specialists say that a credit rating is meant to give guidance to bondholders who may have priorities different from those of taxpayers. Bondholders are primarily interested in making sure the state can pay off its debts, even if that requires cuts to government services or tax hikes, options that tend to be less popular among taxpayers. Massachusetts, for example, was praised by Moody’s this month for its willingness to close budget gaps through “new revenues and expenditure reductions.’’
Governor Deval Patrick’s proposed budget for the coming year trims spending by $570 million, including a $65 million hit to local aid. The overall cut is the largest year-to-year reduction in the state budget in 20 years.
Fitch, in its March 23 report, also praised the 2009 increase in sales tax, from 5 percent to 6.25 percent.
State governments generally have better credit ratings than private entities because “they have powerful management tools,’’ said Nicole Johnson, an analyst with Moody’s. “They can raise taxes or cut spending. They can even push some of the costs down to local government.’’
Andrew C. Bagley, director of research and public affairs for the Massachusetts Taxpayers Foundation, a business-backed group, said the latest credit reports amount to a validation that state government is not burying its head in the sand; it is dealing with the budget, and may well save $10 million to $15 million a year. But pleasing the credit agencies should not be the primary goal of state government, he said. Gonzalez agrees.
“You certainly wouldn’t turn to the rating agencies and say, ‘Is this the way we should finance government?’ ’’ said Bagley. “You wouldn’t do that. It would have disastrous results.’’
Noah Bierman can be reached at firstname.lastname@example.org.