S&P Global Ratings has lowered its ratings on the Commonwealth of Massachusetts' approximately $22 billion of parity general obligation (GO) bonds outstanding to 'AA' from 'AA+' and its rating on Boston Housing Authority housing project bonds, West Broadway Homes IV project, series 2003, supported by the commonwealth, to 'A' from 'A+'. S&P Global Ratings lowered its ratings on the Massachusetts Qualified Bond Act (Massachusetts General Law, Chapter 44A) and Massachusetts State College Building Authority state aid intercept program bonds, which move in tandem with the state GO rating, to 'AA-' from 'AA'. In addition, S&P Global Ratings lowered its rating on the Massachusetts Bay Transportation Authority's bonds to 'AA' from 'AA+', reflecting the reliance on transfers from the commonwealth. The outlook on all ratings is stable.

"The downgrade reflects what we view as the commonwealth's failure to follow through on rebuilding its reserves as stipulated through its own fiscal policies aimed at mitigating the state's propensity for revenue volatility," said S&P Global Ratings credit analyst John Sugden.

Image: Fotolia
Image: Fotolia

On balance S&P views the commonwealth's modest reserves, tendency to experience revenue volatility, elevated debt levels, and below-average pension funded ratio as commensurate with a 'AA' rating. 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, upon which the S&P 2011 upgrade to 'AA+' was predicated, in part. S&P views it as a missed opportunity that the state has opted against building its reserve according to its policies and leaves it on a course to experience greater fiscal stress in the event of an economic downturn or if federal funding were capped or trimmed in a material way. The state's reserves peaked at fiscal 2012 levels and, after declining through 2014, balances have stagnated in the years since. However, S&P recognizes the state benefits from world-class institutions of higher education, the commonwealth's workforce attracts growth-oriented research and development industries that enable its economy to consistently grow at a faster rate the nation's, but from a credit standpoint it has not insulated itself from an economic slowdown or other outside uncertainties that a higher rated issuer would do during a period of economic expansion.

At the same time, S&P Global Ratings assigned its 'AA' rating and stable outlook Massachusetts' $100 million GO bonds consolidated loan of 2017 series C, $400 million GO bonds consolidated loan of 2017 series D, and $284.85 million GO refunding bonds of 2017 series D.

The stable outlook reflects S&P’s view that Massachusetts' strong economic growth and proactive management will allow it to continue to manage its budgetary pressures, even amid midyear budget shortfalls, albeit with some continued use of one-time measures to balance the budget. At the current
rating level, S&P expects the commonwealth to maintain relatively stable, although somewhat limited, reserves. S&P further expects it to take measures to manage the impacts of potentially increased Medicaid costs should healthcare reform legislation negatively affect revenues.

Should the commonwealth demonstrate a renewed commitment to building its reserves during periods of economic growth, absent rising long-term liability funding pressures, S&P could raise its rating.

The rating could see further downward pressure if the commonwealth fails to maintain near-structural balance during periods of economic expansion. Among the factors that could further pressure the rating are increased Medicaid costs, reduced funding, and growing fixed costs in excess of revenue growth leading to significant structural imbalance and greatly diminished reserves.

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