Massachusetts jump-starts string of bond sales with $500 million deal

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Massachusetts intends to kick off a busy spring Tuesday with a $500 million competitive sale of fixed-rate, tax-exempt new-money general obligation bonds.

The sale will consist of equal tranches of Series C and D bonds. Maturities will run from 2029 to 2034 for Series C and 2035 to 2048 for Series D.

The commonwealth sold $600 million of GOs in January.

“Since we last spoke in December, several events have occurred – major tax reform, a roller-coaster equity market [and] rising interest rates,” state Treasurer Deborah Goldberg said on an investor call. “We have plans to return to the market for several more financings prior to our fiscal year end.”

According to Sue Perez, deputy treasurer for debt management, Massachusetts in early May plans a negotiated refunding of $200 million to $250 million, also tax-exempt, fixed rate. In June, the commonwealth expects to sell $250 million of new-money, fixed-rate, tax-exempt Commonwealth Transportation Fund bonds, which fund both its rail enhancement and accelerated bridge programs.

Acacia Financial Group Inc. is financial advisor for Tuesday’s sale. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC is bond counsel.

Fitch Ratings and Moody’s Investors Service rate the bonds AA-plus and Aa1, respectively. S&P Global Ratings rates them AA. All three assign stable outlooks.

“Massachusetts' Aa1 rating reflects the state's growing economy, anchored by healthcare and technology sectors,” said Moody’s. “The state closely monitors expenditures and revenues; in recent years these acts, combined with ample executive authority to make mid-year cuts, have resulted in balanced budgets and adequate liquidity.

“Debt and pension liabilities are among the highest in the nation, though these figures include borrowing and benefits for local governments.”

Gov. Charlie Baker’s $40.9 billion fiscal 2019 budget is before lawmakers. The amount excludes $452 million in projected transfers to the Medical Assistance Trust Fund, which represented an increase of 2.6% over projected fiscal 2018 spending.

The governor’s plan anticipates a $96 million deposit to the stabilization, or rainy-day fund for fiscal 2019. That amount, assuming a $66 million deposit for FY18, would raise the fund balance to $1.4 billion.

Baker, who took office in January 2015, told investors the budget includes less than $100 million in non-recurring revenue items.

The plan includes $1.1 billion in unrestricted local aid, $4.8 billion in kindergarten through 12th grade education aid and $585 million for the Department of Transportation, including the Massachusetts Bay Transportation Authority, a DOT and under a fiscal oversight board.

“We’ve made significant progress on eliminating the structural budget deficit we began with, slowing the rate of spending growth and protecting and rebuilding the commonwealth’s rainy-day fund,” said Baker.

S&P lowered Massachusetts from AA-plus last June – the commonwealth’s first downgrade by a major bond rating agency since 1990 -- citing the failure by state officials to follow through on rainy-day replenishment despite economic growth above the national average.

Massachusetts has experienced a prolonged economic expansion that included the relocation of Fortune 500 behemoth General Electric Co. from Fairfield, Conn., to Boston’s Seaport District.

“Massachusetts has a fundamentally strong economy with strong growth prospects,” said Fitch. “Its dynamic, service-oriented economy includes numerous institutions of higher education and health care that lend stability, in addition to supporting development and innovation in other sectors.”

The state’s per capita personal income, at 131% of the U.S. average in 2017 on a preliminary basis, is the second highest in the US, according to Fitch.

“Educational attainment is very high, and population growth has approximated that of the U.S. during this decade, a shift from historical experience of slow population gains," the rating agency wrote. “Despite this shift, the Commonwealth's population profile remains older than the U.S. average, consistent with other states in the region.”

By law, the House of Representatives and Senate pass separate spending plans, after which a reconciliation panel enacts a final version to send to the governor. The new fiscal year begins July 1.

House Democratic leaders have called for a 3% increase in spending, no tax increases and stricter oversight of the Massachusetts State Police after reports surfaced of overtime abuse, drinking on the job and the doctoring of an arrest report for a judge's daughter. The latter triggered the resignation of state police chief Col. Richard McKeon.

The House Ways and Means Committee's budget, released April 11, proposes a new audit division within the state police and a new commission to review hiring and promotion practices.

The House plan would add roughly $124 million in aid for public schools, exceeding Baker’s request by about $20 million, and add $37 million for drug addiction treatment, including the creation of five new state-run recovery centers.

Under the commonwealth’s debt affordability guidelines, Massachusetts can issue up to $2.34 billion of debt in fiscal 2019.

Recently enacted federal tax changes are complicating budgeting and revenue forecasting for many states, Fitch said in a report Tuesday.

“While most of the ripple effect will play out over time, provisions including the cap on [state and local tax deductions] are a likely trigger behind a spike in state revenue collections for the current fiscal year," said Fitch director Eric Kim.

In Massachusetts, said Fitch, individual income tax collections through January 2018 were up nearly 12% from the prior year -- after the commonwealth recorded just 3% annual growth in January 2017.

“Many states are seeing robust year-over-year gains in revenue collections, though this will likely amount to little more than a one-time boost with income tax collections set to level off for the rest of the fiscal year,” said Kim.

Two November ballot questions -- the listing of one is pending state court approval -- could affect Massachusetts finances.

This spring the Supreme Judicial Court will determine whether a so-called millionaire's tax, called the Fair Share Amendment and backed by the liberal advocacy group Raise Up Massachusetts, can appear on the ballot. Supporters say it could generate roughly $2 billion for transportation and education.

In addition, the Retailers Association of Massachusetts is behind an initiative to reduce the sales tax to 5% from 6.25% and establish a permanent tax-free weekend.

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Primary bond market Sell side Charlie Baker Deborah Goldberg Commonwealth of Massachusetts Massachusetts