Rating agencies praise state, but also issue warning

Hail rise in rainy day fund, raise concerns about coastal flooding


THE BIG THREE credit rating agencies had largely good things to say about Massachusetts this month, but one firm warned that the strong economic fundamentals and growing state reserves have a counterweight in the state’s vulnerability to coastal storms and flooding.

The state is preparing for a $1 billion bond sale next week and the rating agencies have been offering their views on the sale, the Massachusetts economy broadly, and Beacon Hill’s budget management. The most detailed look came from S&P Global Ratings, which announced last week that it had revised its outlook on Massachusetts’ general obligation bonds from stable to positive and hinted that the continued swelling of the state’s stabilization fund could convince its analysts to look even more favorably upon the Bay State.

“The outlook revision reflects the state’s improved reserves, which, if sustained through near-term recessionary pressures at levels commensurate with a higher rating, could change our view of the state’s commitment to building reserves,” S&P Global Ratings credit analyst Ladunni Okolo said.

In June 2017, S&P downgraded its rating for Massachusetts bonds to AA from AA+, largely due to the state diverting money from the Stabilization Fund while the economy was growing. But things have changed significantly in the years since.

Massachusetts pumped $2.3 billion into its Stabilization Fund during fiscal year 2022, which ended June 30, bringing the reserve account’s balance to a historic high of $6.9 billion “or a strong 12.4% of operating expenditures,” S&P said. And the fiscal year 2023 budget has the Stabilization Fund on track to reach another record high of $8.4 billion by next summer, or 13.5 percent of operating expenditures. There is no one-size-fits-all rule for how much a state should hold in reserve, and lawmakers face an unending list of demands for new appropriations, but 10 percent of budgeted spending has long been considered an ideal target.

Underlying the state’s fiscal performance and credit rating, S&P said, is “a strong economy, with the second-highest per capita income level in the nation, partly due to an above-average presence of high-technology companies in the Boston metropolitan statistical area (MSA).”

But the fact that so much of Massachusetts’ economic engine is based near the Atlantic coast and is vulnerable to the kind of disruptive events that climate change is making more frequent — like high-tide flooding and strong coastal storms — works against it, too.

“We consider Massachusetts’ environmental risks moderately negative in our credit rating analysis because of the commonwealth’s coastal exposure, with about two-thirds of its population in the Boston MSA and substantial property value in the combined Boston and Cape Cod area exposing the state to significant economic disruption following a high-impact event,” S&P said in its announcement last week. “However, we also note that the commonwealth has been addressing environmental risks since 2004 through its Climate Protection Plan and has historically maintained a stable management and policy framework to respond to developing risks.”

There were 44,268 residential properties (defined as one to four units) in Massachusetts that had “substantial flood risk” in 2021 and were expected to have a collective loss of $233 million in 2021, according to a 2021 report from climate risk research group First Street Foundation. The report projected the average expected annual loss per property to be $5,264 in 2021.

“This will grow to $7,116 for these same properties in 2051. This additional 35% increase over time is due to a continually changing climate and the resulting environmental conditions that are increasing flood likelihood and damage to these buildings,” the report said. “Over the next 30 years, an additional 4,807 properties are expected to experience financial loss from flood damage.”

S&P also warned that persistent “national recessionary pressures,” underfunding of pensions, and other long-term liabilities “could lead to budgetary pressures as revenue growth softens and tests the commonwealth’s commitment to strong [Stabilization Fund] levels in the next two years.”

The other two credit rating agencies, Moody’s Investors Service and Fitch Ratings, have also taken notice of Massachusetts’ growing rainy day fund and strong post-pandemic economic picture.

“Massachusetts has navigated the economic and fiscal disruptions of the pandemic without materially affecting its strong operating performance and remains well-positioned to continue doing so. The state’s position has been bolstered by a solidly funded stabilization fund, its budget reserve, and substantial federal economic stimulus and pandemic aid,” Fitch said.

Fitch measured the Stabilization Fund in terms of total revenue and pointed out that the $8.4 billion expected to be socked away by next summer would be equal to 21.2 percent of annual state revenue, up from 16.9 percent in fiscal 2022.

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Moody’s said that the Bay State’s overreliance on “economically sensitive revenues” like income taxes and capital gains taxes is balanced by “healthy reserves” and the ability to borrow money.

“Massachusetts’s strong governance framework is reflected in its sound financial and budgetary management practices, which serves the commonwealth well through the economic downturns,” Moody’s wrote.