Business & Tech

Evan Horowitz | quick story

S&P calls it: Massachusetts is headed the wrong way

Pat Greenhouse/Globe Staff/File

Massachusetts was warned. Two years ago, the ratings agency, Standard & Poor’s Financial Services, told state lawmakers to put more money in the “rainy day” fund; otherwise, it would warn investors to rethink the surety of state bonds. Unfortunately we didn’t heed that warning, so last week S&P downgraded Massachusetts’s credit rating from AA+ to AA.

The real world impact is likely to be small. AA is still a pretty good rating compared to other states. And while investors might now be slightly less willing to finance state debts as a result, the effect will likely be dwarfed by other factors, such as whether the Federal Reserve keeps raising interest rates.

Still, a ratings downgrade is never a good sign. It hasn’t happened to Massachusetts since 1990, and it suggests to investors that there may be rot in the state’s fiscal house.


So how worried should we be? Let’s consider both sides, starting with the “don’t worry, be happy” argument — that going from AA+ to AA isn’t really that big a deal.

Get Talking Points in your inbox:
An afternoon recap of the day’s most important business news, delivered weekdays.
Thank you for signing up! Sign up for more newsletters here

In theory, a ratings downgrade could make it more expensive for the state to borrow money, but the real-world evidence for this is weak. This is especially true in cases like ours, where only one of the big three ratings agencies is changing course.

What’s more, most state debt is fixed-interest, so even if the downgrade did push borrowing rates up a bit, it would only affect new bonds. Existing obligations would remain largely unchanged.

And then there’s this mitigating factor: what’s bad for the state could actually be good for cities and towns. That’s because there’s a big pool of in-state investors whose chief concern is getting the tax break that comes from investing somewhere — anywhere — within the state. For them, if state bonds suddenly become less desirable, that just makes city bonds look better, which could benefit municipalities from Boston to Springfield and beyond.

Each of these counts as a reason not to exaggerate the impact of S&P’s decision.


But before you get too comfortable with that AA rating, there is a less-hopeful perspective on all this. And it starts with a peek at the state’s rainy day fund, the savings account that Massachusetts leaders are supposed to keep stocked for when the economy collapses.

Currently, we have about $1.3 billion in the fund, which is a full billion shy of where we were in 2007 before the financial crisis. Back then, we had enough reserves to fund roughly four weeks of state government spending — today it’s less than two.

Without a larger reserve, the next recession could push the state budget past the breaking point, imperiling lawmakers’ ability to pay for core programs and honor debt obligations. This scenario may not seem likely, but what S&P is essentially saying is that Massachusetts has become more vulnerable to this sort of recession-induced crisis.

And while the solution may seem simple — put more money into the fund — that’s easier said than done. We don’t have extra money lying around. Quite the opposite, in fact: we have a perpetual budget deficit, which we have filled in part by diverting money that is supposed to go into the rainy day account.

But now is precisely the time when we should be reversing the flow and replenishing our reserves. The economy is relatively good, and has been for nearly eight years. To be sure, the growth isn’t red hot. It would be nice if wages and incomes were increasing even faster — thus boosting tax revenue — but in the end, you need to budget for the economy you have, not the economy you want.


That may be the best way to think about the ratings downgrade. On its own, it’s unlikely to directly impede Massachusetts’ near-term ability to sell bonds and raise money.

But S&P is using its rating system like a lighthouse beacon, warning us that we are approaching a dangerous shoal: falling short of revenue expectations, facing the prospect of a huge cut in federal assistance, and now losing investor confidence.

Unless we fix our budget problems soon, we may founder when the next recession hits.

There is no consensus about how to do this, however. One hope — particularly among liberals — is that voters will bail lawmakers out by approving a constitutional amendment raising taxes on the highest-earning households. But that path is slow, obstacle-ridden, and strongly opposed by conservatives.

Meantime, you’d better cross your fingers that we don’t trip into a recession and justify S&P’s decision.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the US. He can be reached at Follow him on Twitter @GlobeHorowitz.