Treasurer Steven Grossman said Massachusetts’ recent move to become the fourth state to have more than $1 billion in its rainy-day account sends an emphatic message.
“We’re doing everything we can to demonstrate to all three major bond rating agencies that we are very focused on our long-term development strategy,” Grossman said in an interview after Gov. Deval Patrick’s administration proposed earmarking $300 million of a $460 million fiscal year surplus to the reserve fund.
If lawmakers pass the proposal, Massachusetts would have $1.07 billion in its reserve fund, joining New York, Alaska, and Texas in the $1 billion category. “This puts us in a very special league,” Grossman said.
Massachusetts’ general obligation bonds are rated Aa1 by Moody’s Investors Service, AA-plus by Fitch Ratings, and AA by Standard & Poor’s.
More states are considering replenishments to their rainy-day funds to enhance or maintain their credit ratings. “There is a strong desire on the part of states to do this, particularly those that can afford to,” Grossman said. “Of course, you have to align this effort with the resources available.”
Examples include neighboring Vermont, a triple-A state, where Treasurer Elizabeth Pearce favors building the rainy-day fund out to 8% from its current 5%, and double-A-plus Oregon, where dedicating interest earnings on the state’s general fund to a rainy-day account could elevate it to the 16 other triple-A states.
Massachusetts’ reserve amounts to roughly 3.5% of its $30.7 million budget. “There’s no fixed amount or percentage we recommend for state reserve levels,” said Moody’s vice president Nick Samuels.
“It’s clearly a credit positive development,” he said of Massachusetts’ move. “They had built high levels of reserves and used the reserved wisely to mitigate even more severe cuts during the downturn. Now they’re beginning to rebuild at a faster pace than originally anticipated.”
Robin Prunty, a managing director for public finance ratings at S&P, said such moves are not unprecedented. “Following recessionary periods, you see states evaluating policies relating to reserves and budgets, and make enhancements based on their experience through the recession.”
Reserve fund replenishments helped the bond rating of Gloucester, a seacoast city 30 miles north of Boston. Moody’s in June removed Gloucester’s negative outlook while affirming its Aa3 rating.
Grossman, discussing municipalities in general, said the new state law that curbs health care costs will enable cities and towns to save as much as $100 million a year and help their bond ratings.