Despite the slow pace of the economic recovery, Massachusetts local governments continue to maintain their strong credit quality, says Moody's Investors Service in a report.
The commonwealth's diverse and improving economy, combined with a steady growth in property tax revenues, have led to general stability in the 282 municipal issuers that Moody's rates in Massachusetts. Local governments in the commonwealth benefit from its high wealth levels, educated workforce, and a housing market that proved resilient through the recession. Most local governments also feature strong governance and fiscal management and lower debt burdens to mitigate rising long-term liabilities in pensions and other post-employment benefit (OPEB) costs.
Massachusetts local governments do, however, face ongoing challenges. Potential federal budget cuts in the job-heavy areas of defense, healthcare and research could impair the commonwealth's economic recovery. Local governments also face rising pension and OPEB costs, limited to no growth in state aid to municipalities, and reserve levels that are lower than the national median. These topics are discussed in the Moody's report "Credit Trends: Massachusetts Local Governments Maintain Strong Credit Quality During Slow Economic Recovery."
Managing these challenges will determine whether the municipalities are able to maintain their long-term financial health and credit strength.
"Over the medium term, we believe many local governments will continue to draw on their residents' high wealth and historical support of government services to provide property tax growth and, in some cases, overrides of Proposition 2 ½ to sustain credit strength," says Nicholas Lehman, a Moody's Analyst.
Although Proposition 2 ½ limits property tax revenue growth, the mechanics of the cap allow for property tax revenue increases even as taxable values weaken. Proposition 2 ½ limits growth in the property tax levy, not the rate, so in years of flat or falling assessed values, local governments are still able to raise the levy 2.5% over the previous year.
Massachusetts municipalities have increased their tax levies regularly, and these have grown at an overall rate of approximately 5%, which represents a combination of the allowable 2.5% growth, additional revenue from exclusions to the levy limit for new development, as well as voter-approved increases.
"Given that ad valorem taxes are one of the most stable sources of local government revenues, communities in Massachusetts benefit from a steady and predictable stream of operating revenue," says Tom Compton, a Moody's Associate Analyst.
During 2008 and 2009, Moody's downgraded a higher proportion of Massachusetts local governments than it did U.S. local governments as a whole, as local governments in Massachusetts drew on reserves because of some mid-year state aid cuts.
But since 2009, rating downgrades of local governments have been less frequent in Massachusetts than in the U.S. as a whole, and Massachusetts has been outperforming the nation in rating upgrades as a percentage of total ratings.