Rating Agency Sees Savings Drawdown as “Moderate”
S&P: Capital Gains Revenues Aiding State Government
2/22/21 1:26 PM
FEB. 22, 2021.....A key credit rating agency on Monday gave its blessing to Gov. Charlie Baker's proposed $1.6 billion withdrawal from the state's rainy day fund and suggested the state could have some budgetary flexibility by this summer.
S&P Global Ratings, which in 2017 lowered its rating for Massachusetts bonds to AA largely due to the state diverting money from its stabilization fund while the economy was growing, said in a report Monday that it is not concerned with Baker's proposal to pull money from the stabilization fund in fiscal year 2022, partially because of the rosier-than-expected performance of state tax collections.
Seven months through fiscal year 2021, Massachusetts state government has collected $764 million more in taxes from people and businesses than it did during the same seven pre-pandemic months of fiscal year 2020.
"While budget challenges remain, contributing to a likely second consecutive year of decline in the commonwealth's budget stabilization fund, revenues are projected to come in much stronger than projected shortly after the pandemic began," S&P Global Ratings credit analyst David Hitchcock said.
Baker's proposed withdrawal of $1.6 billion in fiscal 2022 is "what we view as a moderate drawdown," S&P said in its report. The pull would shift the stabilization fund "from levels we believe are currently good, to a level we would still consider adequate," the agency said.
The subtraction from the fund would leave the state's piggy bank with a balance of $1.105 billion as of July 1, 2022, according to the administration. If the federal government makes more relief funding available to states or if the tax collection picture brightens further, the use of rainy day fund money in fiscal 2022 would be reduced, an administration official said.
When the Baker administration rolled out its latest budget proposal (H 1) in January, Administration and Finance Secretary Michael Heffernan said he was not concerned that the rating agencies might frown upon the state's use of its rainy day fund in fiscal year 2022 even though it is projecting that state tax revenues will grow by 3.5 percent.
"It is still raining, COVID is still very much here, the response is still very much here. We want to get kids back in school, we have over 300,000 people on unemployment. This is a time when the state is needed the most. And so we're budgeting, as I said, from a response to recovery to make sure that we have the right resources in the right place at the right time," he said. Heffernan added, "I think this is exactly what the stabilization fund is made for."
S&P seemed to agree Monday, saying in its report that "drawdowns of this magnitude are to be expected during economic downturns and not necessarily a cause for credit concern unless indicative of a large ongoing structural deficit, or the state lacks willingness to rebuild reserves during strong economic times."
The S&P report noted that "mid-fiscal 2021 tax revenues are ahead of the same period in 2020, and well ahead of the 2021 budget, with growth projected to continue into fiscal 2022." Though the Department of Revenue still expects it will be looking at a drop of $90 million from actual fiscal 2020 tax collections when fiscal year 2021 ends, S&P said it believes the state's "overall operating revenue would still be stable thanks to increased federal aid."
The state's revenue projections, Hitchcock said, "indicate some fiscal 2022 budget flexibility will exist when the time comes to enact a final budget" in late June or early July.
Looking at the state's "robust fiscal 2021 revenues," S&P suggested a possible reason for the better-than-expected performance of non-withheld income tax related to future estimated income tax payments.
"We believe the rise in estimated income tax payments could be related to capital gains tax volatility as we ranked Massachusetts the fourth most sensitive state to potential swings in capital gains tax," the agency said. "There are times -- such as now -- when this works to the commonwealth's advantage, although it can also create above-average revenue risk when capital markets do poorly. Strong state income tax collections during the first seven months of fiscal 2021 helped outweigh a slow 1.1% increase in sales taxes, which were weakened by a 32.6% decline in state meals sales tax as a result of pandemic restrictions."
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