HARTFORD, Conn. -- Massachusetts local government ratings remain stable due to generally improved budgetary reserves in 2015 and 2016 and an expanding economy, said a report by S&P Global Ratings.
In its report, “Strong Credit Conditions Persist but Challenges Loom,” S&P said rising pension and post-employment benefit costs, coupled with revenue-raising constraints, could present challenges.
Massachusetts remains among the states with the most AAA-rated local governments, said analyst Christina Marin.
“Nevertheless, although the state's strong wealth and income indicators are unlikely to change, this might not be enough to protect credit quality in the long term from rising retirement costs," Marin added.
Of S&P’s 205 ratings on Massachusetts governments, 92% are AA-minus or higher. In the past year, said S&P, reserves improved on average 7%, and 34% since 2011.
“We attribute the higher fund balance levels to strong motor-vehicle excise tax collections and a surge in building permits – two revenue streams that are correlated to economic swings,” said S&P.
Although the Bay State’s strong wealth and income indicators, which have supported higher ratings in the past, are unlikely to change, this might not be enough to protect credit quality from postponed costs associated with pension and other postemployment benefits, said S&P, particularly if cities and towns are unwilling to override their levy limit under Proposition 2-1/2.
"This will inevitably require municipal managers to make tough choices and possibly, should the financial performance weaken or reserves shrink, lead to a decline in credit quality," said S&P.
"However, credit quality will likely remain unaffected for those municipalities that have prepared for higher retirement costs with robust forecasts, modest spending, and strong reserves, or for communities with a tax base that supports higher taxes."
At risk are those with lowest pension-funded ratios, highest unfunded retirement benefits and limited budget flexibility. S&P expects neither new growth nor state aid to bring enough relief.