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S&P revises outlook on Mass. debt to ‘negative’

A major Wall Street bond rating agency is expressing caution about the Commonwealth’s dwindling rainy day fund, lowering its outlook on Massachusetts bonds to negative from stable.

Standard & Poor’s Ratings Services maintained its AA+ rating for $20.3 billion in Massachusetts general obligation bonds but cited concerns about government spending and the use of emergency funds to plug holes in the state budget over several years.

In a report Monday, Standard & Poor’s credit analyst David Hitchcock said the revision was based on “a projected decline in financial reserves, despite a prolonged period of economic expansion and generally positive revenue trends.”


The report said the state’s drawdown in reserves could contribute to a lower overall rating in the future, “if we feel that financial flexibility is impaired — especially in light of relatively high fixed costs related to debt and retirement funding.”

Lower debt ratings make borrowing money more costly for the state, and therefore for taxpayers.

Financial watchdogs had been warning about the government’s recent tendency to dip into the rainy day fund to plug holes in the state budget.

State Treasurer Deb Goldberg, commenting on the first negative news for the state’s bonds in several years, said in a statement, “While we have retained our current AA+ rating, we recognize and acknowledge the areas of concern raised today.”

The current balance of the rainy day fund is $1.25 billion, down from $2.3 billion in the summer of 2007, before the Great Recession. Credit analysts generally want to see emergency funds building up in times of economic growth, as Massachusetts has experienced in recent years.

Last week, another bond-rating agency, Moody’s Investors Service, was less pessimistic in a review of the state’s finances, maintaining a stable outlook.

Moody’s said its rating was based on the Commonwealth’s ability to make its debt service payments and reflects its “strong financial management practices and its demonstrated willingness to balance its budget when necessary through spending cuts, revenue increases, and use of reserves.”


However, Moody’s also cited concerns about the state’s debt levels, among the highest in the nation, and large unfunded pension liabilities.

Regarding the S&P report, Goldberg said she would “continue to emphasize the importance of building our reserves, and I look forward to working with the administration and Legislature to establish the path to a healthier, stronger reserve balance for Massachusetts.”

Administration and Finance Secretary Kristen Lepore blamed the Patrick administration for the financial issues. She said in a statement that it would take a “multiyear fix to overcome issues which we inherited.”

The Commonwealth has maintained its current ratings since September 2011.

S&P on Monday also said it had revised its outlook on the Massachusetts State College Building Authority state aid program bonds to negative from stable. Those ratings move in tandem with the general obligation rating, S&P said.

Beth Healy can be reached at beth.healy@globe.com. Follow her on Twitter @HealyBeth.