June 15, 2024

Rise To Thrive

Investing guide, latest news & videos!

With flush reserves, Massachusetts gains S&P outlook boost

2 min read
With flush reserves, Massachusetts gains S&P outlook boost

S&P Global Ratings lifted its rating outlook for MassachusettsAA-rated general obligation bond debt to positive from stable, citing progress on several long-term fiscal obstacles.

The state’s robust economic recovery from the early pandemic led to larger-than-expected tax hauls in 2021 and 2022, funds S&P said Fridaywere used to pay down billions in debt and build up reserves to the highest level in state history.

Facing headwinds of a potential national recession, it leaves Massachusetts in “an extremely strong financial position” that, “if sustained through near-term recessionary pressures” could lead to more positive reassessments of credit health, said the report.

Ladunni Okolo, an S&P Global Ratings director, said the positive attention paid to beefing up reserve levels was an important factor in steadying the state’s outlook.

Massachusetts began an about-face in terms of reserve funding in 2018 with the passage of a capital gains tax paid directly to state reserve coffers. In 2015, the state’s reserve rate was just 2% of operating costs, according to Okolo.

However, the largest deposits have come recently from strong tax revenue receipts, said Okolo, which brought the reserve balance to $6.9 billion, or 12.4% of the government’s operating expenditures.

“The upper threshold is if you’re able to build above 8% of your reserves and they’ve done that for the past two years,” she said. “In terms of our positive outlook, we’re looking on if they’re able to sustain that.”

David Hitchcock, a senior director in S&P’s U.S. public finance division, also said future rating decisions will take into account whether the state will continue this trend of fiscal prudence into the future.

Most states are having “relatively flush financial times right now,” said Hitchcock, so continued attention to reserve rates and long-term debt, especially pension obligations, were key to keeping Massachusetts’ continued outlook positive.

“That’s the purpose of an outlook, it’s a one out of three chance that there could be a rating change,” he said. “We’ll see if there’s a recession in the coming year and, for all the states, how they respond. Is this just a temporary thing or not?”

In Friday’s report, S&P also assigned the AA rating and positive outlook to $1.1 billion of general obligation bonds the state preparing to price.

The bonds are expected to be offered by negotiated sale during the week of Oct. 17, with Morgan Stanley running the books. PFM is municipal advisor and Mintz is bond counsel.

Moody’s Investors Service rated the bonds Aa1 with a stable outlook and Fitch RatingsAA-plus and stable.