Bloomberg News

Massachusetts Rewarded as Democrats Slash Costs: Muni Credit

September 21, 2011

Sept. 21 (Bloomberg) -- Massachusetts, which earned a higher credit rating from Standard & Poor’s a month after the company stripped the U.S. of its top grade, is being rewarded as Democratic lawmakers defy union leaders and seek to curb worker benefits.

The state increased its sale 5 percent to $500 million today with yields down by half relative to AAA tax-exempt debt since May. S&P raised its ranking last week, citing “progress in improving financial, debt and budget-management practices,” as well as a decision to replenish fiscal reserves as the economy rebounds. Democratic Governor Deval Patrick, 55, has pushed to overhaul finances, including trimming public-pension and other benefits.

The rating boost, by one step to AA+, the second-highest, was the first for a state by S&P since the U.S. downgrade on Aug. 5. It shows how Democratic-controlled Legislatures from Massachusetts to California are joining Republican-led chambers in cutting costs and delivering benefits to bondholders.

“Things have generally been on the upswing for the states,” said Craig Brandon, a portfolio manager at Eaton Vance Management in Boston, which oversees about $25.6 billion of municipal debt. “Massachusetts has been in the forefront of states solving their problems from a credit perspective in a more responsible manner.”

Revenue Increases

State tax revenue rose the past six quarters as it recovered from the 18-month recession that ended in June 2009, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. States cut costs by slashing workers and trimming benefits as they faced budget gaps totaling $511 billion in the past four years, data from the National Conference of State Legislatures show.

Massachusetts bonds have the seventh-best total return this year among the 26 states whose debt performance was ranked by S&P Municipal Bond Indices. Including price and interest, Massachusetts returned about 8.2 percent through Sept. 19, 0.6 percentage point more than New York, where Democratic Governor Andrew Cuomo has also cut his budget by winning concessions from state-workers’ unions after threatening to ax almost 10,000.

In California, which this week paid a third less in long- term borrowing costs than in 2009, Governor Jerry Brown brokered with fellow Democrats an $85.9 billion general-fund plan that included $12 billion in spending cuts.

If the state falls $1 billion or more behind its revenue forecast by December, it would cut funding for universities, social services and other programs under a series of “triggers” written into the budget.

Spread Narrows

Patrick’s state sold $500.5 million of tax-exempt debt in a competitive auction to fund its capital program, with a portion due October 2018 priced to yield 1.58 percent, or 13 basis points above top-rated 7-year munis on Sept. 20. That compares with a similar maturity sold in May at a yield of 2.2 percent, or 27 basis points above the benchmark. A basis point is 0.01 percentage point.

Massachusetts finished the fiscal year on June 30 with a $460 million surplus after the state collected more tax revenue than forecast. Lawmakers backed the governor’s proposal to put $300 million into a rainy-day fund, bringing budget reserves back over $1 billion. The state is one of only four with more than $1 billion in reserves, according to Treasurer Steven Grossman.

‘Positive Sign’

“The fact that S&P ultimately did upgrade us in the current environment is a really positive sign,” said Jay Gonzalez, the administration and finance secretary. “They see political leaders approaching these decisions like grown-ups, putting ourselves in a much better position going forward.”

Nine other states have had their ratings raised by S&P since January 2010, while six have taken cuts.

The governor sparked protests when he and Democratic lawmakers sought to permit municipalities in Massachusetts to alter health-care plans for workers and teachers without collective bargaining. Unions also resisted legislation already passed by the Senate that lowers a $20 billion unfunded pension liability by $5 billion through increasing the retirement age and changing how benefits are calculated. The measure, which Patrick proposed, is pending in the House of Representatives, which, like the Senate, is dominated by Democrats.

S&P also cited the governor’s management changes for the upgrade, such as a decision to begin conducting a debt- affordability study, as well as legislation including a law requiring the transfer of capital-gains tax receipts into budget reserves when they exceed $1 billion a year. Lawmakers also boosted the state sales tax to 6.25 percent from 5 percent as the economy began climbing out of the recession.

“There’s been a willingness on the part of commonwealth officials to implement management improvements,” said Robin Prunty, an S&P analyst in New York. “The other thing we’ve observed through this recession is very proactive management of budget gaps.”

--With assistance from Michelle Kaske and Andrea Riquier in New York. Editors: Walid El-Gabry, Mark Tannenbaum

To contact the reporters on this story: Michael McDonald in Boston at

To contact the editor responsible for this story: Mark Tannenbaum at

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