BOSTON – Gov. Charlie Baker is defending the state's fiscal standing after a bond-rating agency took it down a notch for the first time in decades amid concerns about Beacon Hill's reserve funds.
On Friday, S&P Global Ratings said it was lowering the state’s rating to the third-highest tier, AA, and criticized the Baker administration and lawmakers for failing to replenish the rainy day fund.
“Despite above-national average economic growth through a prolonged period of economic expansion, the state has not demonstrated a commitment to its adopted budget reserve policies,’’ the agency said in a statement about the new rating.
The decision, which could affect how much the state pays in interest when it borrows money, was the first time in at least 30 years that Massachusetts’ rating has taken a hit.
Baker said the rating suggests the state “has a lot of work to do,” but he noted that other rating agencies, including Fitch and Moody's, recently affirmed the state’s positive economic outlook and their ratings of AA 1 and AA+, respectively.
“We have made progress to pay down long-term obligations like our unfunded pension liability and ended the previous practice of drawing down on reserves to pay for operating expenses, all without raising taxes,” the Republican said in a statement.
State officials also were quick to point out that the rainy day fund has grown 20 percent since Baker took over in January 2015. One of his first actions was to reverse a planned $140 million drawdown from the fund approved by his predecessor, Deval Patrick.
The fund has a balance of about $1.2 billion, according to the comptroller's office. Reserve funds were not used in the current budget.
In his plan for fiscal 2018, Baker has proposed depositing $98 million into the fund and changing how corporate gains taxes are deposited into it. His proposal is being reviewed by a legislative committee.
Economists are divided over the impact of Baker’s plan, but they agree the state needs to rebuild its reserves to protect against an economic downturn or the possibility that President Donald Trump and Congress might cut billions of dollars in funding to states.
“It’s important for Massachusetts and all states to create structurally balanced budgets that will allow them to build up reserves,” said Noah Berger, executive director of the Massachusetts Budget and Policy Center. “There’s a number of other ways to do it.”
Berger said one way the state could boost reserves is by rolling back some tax breaks, such as the film tax credit that doles out more than $80 million a year to Hollywood production studios.
Senate President Stanley Rosenberg said he agrees the downgrading shows that the state needs to revisit the issue of tax breaks.
"We cannot afford to continue down this path," Rosenberg, a Democrat, said Monday. "It’s time to take a serious look at tax breaks we can no longer afford."
Massachusetts is in the midst of a slow but steady recovery. Its unemployment rate of 3.9 percent is the lowest in 15 years.
But lower-than-expected growth in sales and income-related taxes in recent months are forcing officials to make cuts to the current budget.
In its report, S&P Global Ratings said the state’s failure to build up the rainy fund is a “missed opportunity” that “leaves it on a course to experience greater fiscal stress in the event of an economic downturn or if federal funding were capped or trimmed in a material way.”
House Speaker Robert DeLeo said the downgrade fails to recognize the state’s efforts to rebuild reserves as it reduces pension costs and other long-term obligations.
"We have made difficult decisions, limiting nondiscretionary spending to modest increases in most cases,” DeLeo said. “Meanwhile, the Massachusetts economy remains strong in spite of great uncertainty at the federal and international levels.”
The Democrat-controlled Legislature has siphoned more than $2.2 billion from the reserve fund to cover operating expenses between fiscal years 2012 and 2015, according to the Massachusetts Taxpayers Foundation, a nonpartisan watchdog.
Still, that didn’t stop Democrats who plan to challenge Baker in the 2018 elections from taking shots at the Swampscott Republican, who is also expected to seek re-election.
Jay Gonzalez, who served as secretary of administration and finance under Patrick, said Baker “owes taxpayers an explanation” for “the mess he created.”
“Gov. Baker is failing us,” Gonzalez said in an statement over the weekend. “His mismanagement is now going to cost taxpayers millions of dollars.”
Christian M. Wade covers the Massachusetts Statehouse for North of Boston Media Group’s newspapers and websites. Email him at email@example.com