Armed with an upgrade, Massachusetts will go to market Wednesday with $475 million of general obligation bonds.
“Obviously, we’re hoping there’s plenty of interest in our sale after the upgrade. We’re double-A-plus across the board now,” Treasurer Steven Grossman said in an interview Tuesday, three days after Standard & Poor’s raised the state’s GO rating to AA-plus from AA, with a stable outlook.
The rating and outlook also apply to Wednesday’s sale of Series 2011D GO bonds.
Moody’s Investors Service and Fitch Ratings rate Massachusetts a Aa1 and a AA-plus, respectively. State officials said taken together, the ratings give the commonwealth its highest credit standing ever.
“Frankly, we’ve earned it,” Gov. Deval Patrick said in a statement.
S&P’s move came nine days after Grossman, Patrick and other state leaders made pitches to the three major rating agencies in lengthy meetings at the State House. Massachusetts last spring enacted cost reductions in pensions and municipal health care, and last month proposed diverting $300 million to its rainy-day fund, which would make it only the fourth state with such a fund of more than $1 billion.
“The upgrade reflects Massachusetts’ ongoing progress in improving financial, debt, and budget management practices, while at the same time implementing cost control and reform measures associated with its long-term liabilities,” Standard & Poor’s said in its report.
Other factors affecting the new rating were the commonwealth’s relatively strong budget performance during the recession, bringing its rainy-day fund balance to more than $1 billion, high income levels, and diverse economy.
“We’re behaving ourselves. We’re showing that pension reform is not just a rhetorical device, but a serious pursuit,” Grossman said.
The treasurer expects the state to possibly save “tens of millions” of dollars through the upgrade, but could not pinpoint further. “Bonds are priced based on spreads, the credit markets, turbulence, and ratings,” he said. “It’s hard to pick one element and say a bond rating upgrade will save us X dollars.”
After the Sept. 7 meeting with the rating agencies, Grossman warned not to get hopes too high, especially one month after Standard & Poor’s downgraded U.S. sovereign debt to AA-plus from AAA.
“We cautioned people not to expect an upgrade; we wanted to keep expectations muted,” he said. “The rating agencies are known for being circumspect, but they are very good listeners.”
Standard & Poor’s cited estimates by data provider HIS Global Insight Inc. of Englewood, Colo., that said the state’s unemployment rate will continue to decline, falling to about 7% in 2014. “While we believe economic recovery is likely to be slow, Global Insight projects that Massachusetts will lead the region in recovery,” S&P wrote.
Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo PC is bond counsel and disclosure counsel for the sale, which Massachusetts will offer through competitive bid. Public Resources Advisory Group is financial advisor.
The bonds will mature from 2012 to 2028. The state will use them to fund portions of its capital plan.
“I’m not big on taking victory laps,” Grossman said. “You say 'thank you,’ then you put your head back down and see what you can do next.”
Moody’s said Massachusetts’ challenges include managing expenditure pressure, especially from health care and social services; relatively low pension-funding levels (67.5% as of Oct. 1, 2010); and debt ratios among the nation’s highest: $18.5 billion of outstanding GOs and $29 billion in total net tax-supported debt. In addition, federal downsizing could affect the overall health care sector, Moody’s said.
Grossman said Massachusetts would issue $800 million of revenue anticipation notes in October or November. By contrast, the state had to sell $1.2 billion in August each of the last two years.