Fitch Ratings assigns a rating of 'AA' to the Commonwealth of Massachusetts' approximately $1.1 billion general obligation (GO) bonds, series 2008A. The bonds are being issued for new money and refunding purposes and are scheduled to sell through negotiation the week of September 1. In addition, Fitch affirms the 'AA' rating on about $16 billion outstanding Commonwealth GO bonds. The Rating Outlook is Stable.
The 'AA' rating reflects the Commonwealth's considerable economic resources and record of prudent financial management. Reserve levels remain solid, providing a hedge against the commonwealth's economically sensitive tax base. Credit strengths are tempered by a very heavy debt burden. Like most states, the commonwealth is currently experiencing a decline in the pace of economic and revenue growth.
Net tax-supported debt of about $30 billion equals 9.3% of 2007 personal income. Fitch expects that debt will remain high. In addition to other initiatives, the Commonwealth has announced plans to issue $1.1 billion in grant anticipation notes and $1.9 billion in gas tax revenue bonds to fund an eight-year accelerated bridge rehabilitation program, and recently authorized the extension of the commonwealth credit to certain Massachusetts Turnpike Authority obligations.
Consistent with strong revenue growth and conservative forecasting in recent years, fiscal 2008 tax revenues of $20.9 billion were 6.4% over fiscal 2007 results (after correcting for tax law changes), more than $650 million higher than revised estimates, and $1 billion above the consensus forecast upon which the budget was based. This reflected particular strength in income tax receipts related to capital gains and $218 million in settlements from three financial institutions for taxes due in prior years. While income tax receipts rose 10%, including withholding collection growth of 5.7%, sales tax revenues grew just 0.8%. Despite the revenue over-performance, the Commonwealth drew on stabilization fund moneys, albeit to a lesser degree than originally budgeted. The fiscal 2008 ending stabilization fund balance is estimated at $2.2 billion.
The budget for fiscal 2009 includes corporate tax measures expected to generate $285 million, a cigarette tax increase dedicated to health care spending, and a stabilization fund drawdown to $1.9 billion. The budget relies on a January 2008 consensus tax revenue forecast of $20.987 billion, adjusted for tax changes. Given fiscal 2008 revenue over-performance, excluding the one-time fiscal 2008 settlement payments, tax revenue would need to grow just 1.6% to meet the forecast, compared to the 3.8% growth assumption at the time of the consensus forecast. Nevertheless, in light of economic and financial developments since January and the weakening of revenue collections in the last few months it is possible that the revenue forecast will be reduced at the next review in October. The important capital gains forecast, in particular, seem likely to be revised downward. The Commonwealth is developing contingency plans in the event of lowered revenue forecasts and/or increased expenditure estimates, particularly for health care.
The personal income tax accounts for about 60% of commonwealth tax revenues. A November 2008 ballot initiative would eliminate the tax effective in 2010. This is not a constitutional amendment and, if approved by voters, it could be amended or repealed by the state legislature.
Massachusetts has a fundamentally strong and wealthy economy, with the third highest personal income per capita in the nation (127% of the U.S.). After experiencing among the steepest employment drops in the country in the most recent recession, the Commonwealth has registered year-over-year employment gains in every month since July 2004. Nonfarm employment is still well below peak levels and economic recovery had lagged the U.S.; however, employment growth of 1% in 2007 was just less than the nation's 1.1%. Commonwealth employment rose 0.3% in July 2007 compared to a loss of 0.1% for the U.S. Construction employment fell 2.7% in July 2008 compared to a year ago and financial activities was down 0.7%. Education and health services and professional and business services employment rose 2.2% and 1.4%, respectively. Massachusetts's unemployment levels are below the nation's, with the 5.1% commonwealth rate equal to 89% of the U.S. in July. Personal income growth of 6.3% in 2007 exceeded that of the U.S. and New England but the Commonwealth lagged both the nation and the region in the first quarter of 2008. The current revenue forecast assumes fiscal 2009 employment growth of 0.6% and personal income growth of 4.6%.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.