(Source: Business Wire)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.