STANDARD & POOR’S left the credit rating of the state of Massachusetts intact on Monday but changed its outlook for the state from stable to negative because of concerns about the use of rainy day funds to pay for spending at a time when the economy is growing.
The credit rating, which is critical to efforts to keep the state’s cost of borrowing low, held steady at AA+. But the ratings service said it was changing its outlook for the state to negative because of the heavy use of rainy day funds to buttress spending levels. Standard & Poor’s said the state’s credit rating could fall over the next two years “if we feel that financial flexibility is impaired – especially in light of relatively high fixed costs related to debt and retirement funding.”
The ratings service also said “our negative outlook reflects a projected decline in financial reserves in fiscal 2016 from currently adequate levels, despite a prolonged period of economic expansion and generally positive revenue trends, and which follows previous drawdowns that occurred in 2013 and 2015. The Commonwealth has also suspended scheduled transfers of excess capital gains tax revenue to the [rainy day fund].”
Massachusetts has roughly $20.3 billion in existing general obligation debt and just issued a total of $550 million in additional debt. The new outlook from Standard & Poor’s also applies to debt of the Massachusetts State College Building Authority.
Kristen Lepore, Gov. Charlie Baker’s secretary of administration, blamed the problem on the previous administration of Deval Patrick. “Since day one of this administration, we have stressed the importance of bringing spending in line with revenue, achieving structural balance, and building our stabilization fund, especially in good times,” she said in a statement. “We have made significant progress in each area, but we have always acknowledged that this requires a multi-year fix to overcome issues which we inherited.”
Alec Loftus, a press spokesman during the Patrick administration, saw CommonWealth’s report on Standard & Poor’s decision and Lepore’s comment and emailed a statement sharply disagreeing. “Massachusetts bond ratings reached the highest levels in history and our rainy day fund was bigger than nearly every other state’s during the Patrick-Murray Administration, even in the midst of the Great Recession. Hopefully the Commonwealth’s credit rating is not downgraded by Wall Street as a result of decisions made after Governor Patrick left office,” Loftus said.
Rainy day funds typically shrink during a recession when the economy weakens and tax revenues decline. In those instances, rainy day funds are tapped by state government to soften the impact on programs of the downturn in revenues. But the flip side is also supposed to happen. When the economy recovers and tax revenues pick up, the rainy day fund is supposed to grow as more money flows in and less flows out.
But that pattern has been disrupted lately. CommonWealth reported in September that the amount of money in the rainy day fund had fallen by 28 percent over the last four years even as state tax revenues grew 17 percent. The Massachusetts Taxpayers Foundation issued a report earlier this month warning that the rainy day fund had a balance equal to 3 percent of state spending, which was comparable to low points following the 2002 and 2008 recessions. The foundation said credit rating agencies prefer a balance equal to at least 5 percent, which would be about $2.5 billion to $3 billion.
The Legislature and the governor recently approved legislation diverting $120 million in surplus funds left over from the last fiscal year into the rainy day fund, bringing the balance to roughly $1.25 billion, more than $1 billion to $1.75 billion less than what the Taxpayers Foundation recommended.
