Mass. economy should be well-positioned for rebound, rating agencies say
Flickr/Massachusetts Office of Travel and Tourism
The Massachusetts State House
As lawmakers debate the budget plan for the fiscal year that's already underway and the state Treasury prepares to go to market next week to sell almost $1.4 billion in new debt, credit rating agencies taking notice of Massachusetts's budget management and the outlook for an economic recovery here.
S&P Global Ratings and Fitch Ratings on Tuesday gave strong ratings (AA and AA+, respectively) to about $1.4 billion in bonds the state plans to sell next week and said the outlook on Massachusetts's ratings is stable. The firms also commented on how Massachusetts has managed its pocketbook through the pandemic and what could be in store once a COVID-19 vaccine allows for more normal economic activity.
"To date Massachusetts has navigated the economic and fiscal disruptions of the pandemic without materially affecting its strong operating performance and remains well-positioned to continue doing so," Fitch wrote in its rating statement.
Both agencies pointed out that Massachusetts and its economy were hit hard by the COVID-19 pandemic and the government mandates that limited economic activity as a means of slowing transmission of the virus.
The budget year that ended June 30 wound up about $700 million short of expectations and the Baker administration has forecast that state tax revenues for the current budget year will be about $2 billion less than in fiscal 2020. In June, Massachusetts had the highest unemployment rate in the country and the rate remains worse than the national average.
But the key anchors of the Massachusetts economy -- namely higher education, health care, technology and finance -- and the state's economic fundamentals should put it in a good position to make a solid rebound once pandemic restrictions are lifted, the agencies said.
"We believe that Massachusetts' economy, with a substantial tech sector presence in the Boston area, might be well-positioned to thrive when COVID-19 pandemic restrictions are fully lifted, although capital gains tax could be a weakness in this income tax-dependent state," S&P wrote in its assessment.
Though a good deal of uncertainty remains, Dr. Anthony Fauci this week suggested that the return of more normal economic activity -- unrestricted dining, shopping, and more -- could come by the end of the fiscal year.
"The cavalry is coming," Fauci told Good Morning America on Thursday. The country's top infectious disease expert said that "the ordinary citizen should be able to get" vaccinated against COVID-19 by the "end of April, early May, May, June, somewhere around that time."
The thoughts of the rating agencies hold a lot of weight with state budget managers and lawmakers because the ratings handed down from the firms are a huge part of what determines the state's cost of borrowing. The better the rating, the more favorable borrowing terms the state can get.
Ways and Means Committee chairmen Rep. Aaron Michlewitz and Sen. Michael Rodrigues likely read the firms' rating statements with a particular interest in the comments about using money in the state's stabilization fund to plug holes in the fiscal year 2021 budget.
Gov. Charlie Baker proposed drawing $1.35 billion from the state's $3.5 billion rainy day fund to help cover up a $3.6 billion decline in anticipated tax revenue. The House has been debating this week a budget that features a $1.5 billion withdrawal, and the budget the Senate will debate next week also calls for a $1.5 billion drawdown.
Neither agency commented specifically on the House and Senate plan to pull $1.5 billion out of the stabilization fund, but both commented on Baker's idea of drawing $1.35 billion. S&P said the governor's proposed withdrawal would leave $2.2 billion in the fund, "or what we would view as a still-good 4.5% of expenditures and other uses."
S&P said that its stable outlook for the Bay State "reflects our view that Massachusetts' strong [stabilization fund] provides a cushion allowing the state to ride out the current pandemic-related economic slowdown without significant liquidity pressure. This supposes that the commonwealth's economy will rebound after fiscal 2021, and that Massachusetts will rebuild its [stabilization fund] once the economy is again in an expansionary mode."
In June 2017, S&P lowered its rating for Massachusetts bonds to AA from AA+, largely due to the state diverting money from its stabilization fund while the economy was growing. In the years since, buoyed by a strong stock market and surplus state revenues, Massachusetts financial managers were able to sock away hundreds of millions of dollars into the rainy day fund and boost it to an all-time high ahead of the COVID-19 pandemic.
Last December, when Treasurer Deborah Goldberg was asked by the Ways and Means Committee whether she thought a credit rating upgrade could be in the offing, she told lawmakers that the rating agencies "still harbor a little bit of skepticism" of Massachusetts since the S&P downgrade.
Through four months of fiscal year 2021, state tax collections of $9.347 billion are trending $118 million or 1.3 percent ahead of receipts during the same period of time during fiscal 2020, the Department of Revenue said earlier this month. But by the end of June 2021, DOR expects tax revenues will land somewhere between $25.918 billion and $28.387 billion -- which would be between $2.76 billion and $5.23 billion below the assumption agreed to before the pandemic upended the economy and a drop from final fiscal year 2020 collections of $29.596 billion.
"This is slower revenue growth than the commonwealth experienced in recent years, and could turn negative when the effects of federal stimulus wear off or if a new wave of coronavirus infections occur, but the numbers to date are not as weak as feared earlier in the year," S&P said of year-to-date tax collections in Massachusetts.
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