"State’s bond rating downgraded despite growth" by Joshua Miller Globe Staff June 09, 2017
A national bond-rating agency has downgraded its measure of Massachusetts’ creditworthiness for the first time in almost 30 years, a decision that has the potential to tarnish Governor Charlie Baker’s image as a good steward of the state’s finances.
Despite Massachusetts’ solid growth, S&P Global Ratings said Friday it is lowering the state’s rating one notch, to the third-highest tier, AA, because Beacon Hill leaders have failed to replenish the state’s rainy day fund as promised.
“Despite above-national average economic growth through a prolonged period of economic expansion, the state has not demonstrated a commitment to its adopted budget reserve policies,” the rating agency wrote.
The news may not affect how much it will cost for the state to borrow money, Treasury officials say. The two other top bond-rating agencies affirmed the state’s second-from-highest rating last week, and Massachusetts remains in better fiscal shape than many states, but the decision could be politically damaging to Baker, who has billed himself as a leader who knows how to keep the state’s fiscal ship on course.The Republican, a former state budget chief, won the corner office in 2014 pledging to be a careful custodian of taxpayer dollars and calling himself “a guy who is pretty facile with math.”
Baker has repeatedly proposed and signed budgets that divert money meant for the emergency savings account. State representatives and senators in the Democratic-controlled Legislature have the final say over how funds are appropriated and have agreed to those budgetary tactics.
In an interview, Baker said the downgrade is “a wake-up call.”
S&P warned the state in 2015 about its dwindling rainy day fund, putting Massachusetts on notice that its bond rating could be knocked down. But Baker and state lawmakers did not aggressively attempt to rebuild the savings account in the time since. Instead they diverted money meant for it into the operating budget.
Revenue from capital gains taxes — levies on investment profits — over a certain threshold are supposed be socked away in the savings account under state law. But Beacon Hill leaders have instead used that money to pay for the costs of everyday government.
Diverting money from the rainy day fund is, “a problem because there is volatility in [tax] revenues and the idea is: in periods of strong economic growth, you should prepare yourself for a downturn,” said John A. Sugden, S&P’s primary credit analyst for Massachusetts.
Eileen McAnneny, president of the business-backed Massachusetts Taxpayers Foundation, echoed that sentiment, saying the state’s “inability to follow its own plan to rebuild reserves leaves the state ill-equipped to manage the next recession.”
The rainy day fund is supposed to be a bulwark against extreme cuts to state services when tax revenue falters, but to paper over state budget gaps, policy makers — including Baker and his predecessor, Democrat Deval Patrick — took billions meant for the fund in recent years, even during relatively good economic times with tax revenue increasing.
That money was, of course, spent on state services that otherwise would not have been funded. But it means the cash reserves won’t be there when the economy inevitably turns south. That’s extremely dangerous, fiscal watchdogs say.
In the summer of 2007, just months before the Great Recession began, the state’s rainy day fund had a little more than $2.3 billion. Now, with economists warning a new economic downturn could be coming, the fund is at $1.3 billion.
Patrick, who led the state for eight years, including during the Great Recession, saw bond rating increases during his watch.
The last time one of the big three bond-rating firms — S&P, Moody’s Investors Service, and Fitch — downgraded Massachusetts’ credit rating was March 1990, according to the office of Treasurer Deborah B. Goldberg, which oversees bond sales.
In an interview, Baker underscored that the state’s bond rating with Moody’s and Fitch remains the second-from-highest, and that he does not expect the S&P rating change to hurt the state’s ability to borrow money, nor increase how much it will cost.
“People will continue to enthusiastically purchase our bonds,” he said.
Asked whether the downgrade reflects poorly on him, Baker said, “I think it reflects a trend that they saw ever since they gave us the upgrade as a Commonwealth in 2011, which was that the money they expected to move into the stabilization fund wasn’t going into it.”
Asked whether he takes some responsibility for the credit downgrade Friday, Baker replied, “Of course, yeah, sure, absolutely. Look, they made clear to us in April of 2015 that they were concerned about our stabilization fund balance and the fact that the state hadn’t been putting money into it.”
He said, however, the downgrade by S&P “is not remotely comparable to what happened in 1990.” Then the state was on a much more wobbly financial footing and had much worse bond ratings. On Friday, S&P emphasized the state’s many fiscal strengths including “swift action” from policy makers when a budget gap emerges, but, Baker, sitting in his ceremonial office that dates to 1798, acknowledged “it’s a wake-up call” to regularly put more cash away in the fund.
A spokesman for Senate President Stanley C. Rosenberg declined to comment.
House Speaker Robert A. DeLeo said his chamber has prioritized paying down the state’s big pension obligations, while also making deposits into the rainy day fund.
In a statement, Goldberg, the state treasurer and a proponent of beefing up the fund, said the state must rebuild the rainy day account and “reaffirm our commitment to fiscal policies that will ensure an upgrade in the future.”
In recent days, two of the Democrats running for governor, Mayor Setti Warren of Newton and Jay Gonzalez, a former state budget chief, have knocked Baker over the budget.
With the S&P news, that criticism ramped up Friday.....
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The “emperor has no clothes.”
"S&P calls it: Massachusetts is headed the wrong way" by Evan Horowitz Globe Staff June 12, 2017
Massachusetts was warned. Two years ago, the ratings agency, Standard & Poor’s Financial Services, told state lawmakers to put more money in the “rainy day” fund; otherwise, it would warn investors to rethink the surety of state bonds. Unfortunately we didn’t heed that warning, so last week S&P downgraded Massachusetts’s credit rating from AA+ to AA.
The real world impact is likely to be small. AA is still a pretty good rating compared to other states. And while investors might now be slightly less willing to finance state debts as a result, the effect will likely be dwarfed by other factors, such as whether the Federal Reserve keeps raising interest rates.
Still, a ratings downgrade is never a good sign. It hasn’t happened to Massachusetts since 1990, and it suggests to investors that there may be rot in the state’s fiscal house.
So how worried should we be? Let’s consider both sides, starting with the “don’t worry, be happy” argument — that going from AA+ to AA isn’t really that big a deal.
In theory, a ratings downgrade could make it more expensive for the state to borrow money, but the real-world evidence for this is weak. This is especially true in cases like ours, where only one of the big three ratings agencies is changing course.
What’s more, most state debt is fixed-interest, so even if the downgrade did push borrowing rates up a bit, it would only affect new bonds. Existing obligations would remain largely unchanged.
And then there’s this mitigating factor: what’s bad for the state could actually be good for cities and towns. That’s because there’s a big pool of in-state investors whose chief concern is getting the tax break that comes from investing somewhere — anywhere — within the state. For them, if state bonds suddenly become less desirable, that just makes city bonds look better, which could benefit municipalities from Boston to Springfield and beyond.
Each of these counts as a reason not to exaggerate the impact of S&P’s decision.
But before you get too comfortable with that AA rating, there is a less-hopeful perspective on all this. And it starts with a peek at the state’s rainy day fund, the savings account that Massachusetts leaders are supposed to keep stocked for when the economy collapses.
Currently, we have about $1.3 billion in the fund, which is a full billion shy of where we were in 2007 before the financial crisis. Back then, we had enough reserves to fund roughly four weeks of state government spending — today it’s less than two.
Without a larger reserve, the next recession could push the state budget past the breaking point, imperiling lawmakers’ ability to pay for core programs and honor debt obligations. This scenario may not seem likely, but what S&P is essentially saying is that Massachusetts has become more vulnerable to this sort of recession-induced crisis.
And while the solution may seem simple — put more money into the fund — that’s easier said than done. We don’t have extra money lying around. Quite the opposite, in fact: we have a perpetual budget deficit, which we have filled in part by diverting money that is supposed to go into the rainy day account.
But now is precisely the time when we should be reversing the flow and replenishing our reserves. The economy is relatively good, and has been for nearly eight years. To be sure, the growth isn’t red hot. It would be nice if wages and incomes were increasing even faster — thus boosting tax revenue — but in the end, you need to budget for the economy you have, not the economy you want.
That may be the best way to think about the ratings downgrade. On its own, it’s unlikely to directly impede Massachusetts’ near-term ability to sell bonds and raise money.
But S&P is using its rating system like a lighthouse beacon, warning us that we are approaching a dangerous shoal: falling short of revenue expectations, facing the prospect of a huge cut in federal assistance, and now losing investor confidence.
Unless we fix our budget problems soon, we may founder when the next recession hits.
There is no consensus about how to do this, however. One hope — particularly among liberals — is that voters will bail lawmakers out by approving a constitutional amendment raising taxes on the highest-earning households, but that path is slow, obstacle-ridden, and strongly opposed by conservatives.
Meantime, you’d better cross your fingers that we don’t trip into a recession and justify S&P’s decision.
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"Baker wants more money to go to state’s rainy day fund" by Joshua Miller Globe Staff January 25, 2017
In an effort to boost the state’s emergency savings account ahead of what could be tumultuous economic times, Governor Charlie Baker on Wednesday will propose automatically placing money in the rainy day fund every year.
The effort comes as the state is under pressure from Wall Street credit rating agencies, which frown upon Massachusetts’ habit of raiding its savings.
To paper over state budget gaps, policy makers, including Baker, have repeatedly taken billions meant for the fund in recent years — during a relatively good economy — even though the account is meant to be a bulwark against extreme cuts to state services when tax revenue falters.
As a result, the fund has stagnated, but Baker, a Republican who regards himself as a prudent protector of taxpayer dollars, will propose that a small chunk of annual state tax revenue be socked away in the savings account before spending on the rest of state government is funded.
The proposition will come as part of his yearly state budget to be unveiled Wednesday, according to two senior administration officials. The Democratic-controlled Legislature could embrace it, amend it, or nix it.
The rainy day fund is primarily meant to be filled through revenue from capital gains taxes — levies on investment income — that exceeds a certain monetary threshold. But in recent years, policy makers have diverted the cash from the state’s savings account to fill budget holes.
That’s led one key financial overseer to warn that a credit downgrade — which could increase borrowing costs and be an embarrassing political albatross — may be coming for Massachusetts.
To be sure, Massachusetts is still seen as being in fairly good fiscal shape and has the second-from-highest rating from all three big bond-rating agencies, but watchdogs have sounded alarms about rainy day fund gimmickry.....
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FLASHBACK:
"Bond-rating agency gives Baker budget thumbs up" by Joshua Miller Globe Staff February 04, 2016
A top bond-rating agency gave a modest thumbs up to Governor Charlie Baker’s budget proposal Thursday, a boost for the Republican that could help him convince the state Legislature to pass a spending plan in line with the broad strokes of his proposal.
Standard & Poor’s Ratings Services said Thursday that Baker’s proposal suggests “mildly positive credit trends” because of its effort to reduce the state’s reliance on one-time sources of money, and its modest push to restock the state’s drawn-down rainy day fund.
S&P cautioned that the governor’s proposal is just that — the Legislature has the final say over the state budget — and its report does not change the state’s bond rating.
Still, the three-page document is somewhat significant for Baker, who won a 2014 gubernatorial campaign pledging efficient government and fiscal discipline, and is expected to run for reelection in 2018. That’s because the report represents a nonpartisan outside validator offering praise, if restrained, for his spending plan.
Baker last month proposed a $39.6 billion state budget that worked to rein in ballooning health care costs and leave much of state government with essentially the same amount of money it is getting this fiscal year, which runs through June. Baker’s plan would not raise taxes or fees.
Watchdogs generally see relying on one-timers as a bad fiscal practice.
Use of one-timers dropped from $1.2 billion in the fiscal year that ended in June 2015, to an estimated $600 million in the current fiscal year, to $253 million in the governor’s proposed budget for the fiscal year that begins in July.
“We view the potential reduction in the use of one-time budget items as positive from a credit perspective,” the rating agency wrote.
S&P also was upbeat about Baker’s plan to deposit more than $200 million in the state’s rainy day fund, meant for fiscal emergencies but tapped repeatedly by Beacon Hill leaders in previous years even as the economy was humming along.
Still, the New York-based bond-rating agency, offering caution about Massachusetts’ dwindling rainy day fund, sent up a warning flare in late November, saying the state’s bond rating — currently at the second-highest level — may be lowered over the next two years. That could make it more expensive for the state to borrow money, with millions more in debt payments every year.
Baker’s budget chief was, not surprisingly, pleased with the new report.
“The administration is glad S&P recognizes the governor’s budget proposal continues our significant progress toward stronger fiscal stability by reducing the structural deficit, rebuilding the rainy day fund, without raising taxes,” Kristen Lepore, the secretary of the Executive Office for Administration and Finance, said in a statement.
S&P noted however that the state faces fiscal headwinds in the years ahead: high debt and pension liabilities, as well as spending on health care for poor and disabled people that continually increases at a rate far faster than inflation and eats up more than one-third of the budget.
Maybe they can claw back the billions they dole out in corporate welfare.
The analysis is premised on continued economic growth. Left unsaid is that if the economy goes south, Massachusetts would likely be mired in tough fiscal times quite quickly.
Good thing the economy grew faster in Mass. than in US for first quarter.
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Also see:
“The employers who create jobs and prosperity in Massachusetts are under siege from politically expedient laws that collectively impose excessive financial and administrative burdens on the private sector. Massachusetts employers, especially small businesses, are still struggling to implement the new paid sick days law and the three-step minimum wage increase, and fear another mandate,” Associated Industries of Massachusetts spokesman Chris Geehern said in an e-mail.“
Related:
Lawmakers give millionaires’ tax overwhelming endorsement
Equality-loving Mass. looks the other way when it comes to financial status
