Overview

Massachusetts municipalities (or local governments [LGs]) maintained generally stable credit quality through the pandemic and recession. S&P Global Ratings expects continued stability in the near term, despite macro-level economic pressures. Projected stability is supported by high economic metrics relative to national peers, Massachusetts LGs' high reliance on property taxes, and a stable state-aid environment. Debt-funded infrastructure needs and underfunded retirement liabilities could pressure credit quality over the long term if local governments are unable to balance competing priorities within financial and political constraints.

S&P Global Ratings maintains ratings on 235 Massachusetts municipalities. Since November 2021, there were 13 total rating actions affecting 11 LGs, with one negative rating action and 12 positive actions on the LGs' respective general obligation (GO) bonds. Currently, 99% of the 235 Massachusetts LG GO ratings have a stable outlook, two LGs have a negative outlook, and none on positive.

Credit Fundamentals

• Stable operating environment, with generally predictable revenues and expenditures and stable state aid
• Most rated municipalities participate in a broad and diverse metropolitan statistical area (MSA)
• More than 70% of Massachusetts municipalities have good or strong management as assessed by our FMA

Potential Challenges

• For many municipalities, pension and other postemployment benefit (OPEB) liabilities and costs are generally increasing and funding discipline varies. These costs could increasingly pressure budgets if they grow faster than overall budgets
• Environmental risks may be elevated, particularly along the coast, on Cape Cod and the Islands. Managements will play an increasingly important role in addressing potential environmental risk to municipal operations and the tax base
• While the state's property tax limitation is embedded in our analysis and we do not make a distinction between municipalities' unlimited- and limited-tax pledges, growing fixed costs and capital needs could pressure managements' abilities to balance competing expenditure priorities below the levy cap

What We are Watching in 2021 and Beyond

Very few Massachusetts LGs faced material financial pressure during the pandemic and resulting recession. State aid and local property taxes, which represent the predominant revenue sources for LGs, were stable. LGs demonstrated an ability to cut expenditures, primarily through not filling vacant positions, energy and other savings due to closures stemming from pandemic gathering restrictions, postponing nonurgent capital projects, and cutting ancillary services such as recreational programming.

Unemployment rates spiked across the state, particularly in areas with significant service-related employment. According to the Bureau of Labor Statistics, Barnstable County (10.8%), Bristol County (10.8%), Essex County (10.4%), Hampden County (11.0%), Nantucket County (11.1%), Plymouth County (10.0%), and Suffolk County (10.3%) were all elevated at more than 10% in 2020, with several other counties approaching 10%. However, the high unemployment rates did not translate to material financial pressure for LGs, and unemployment rates across the state have fallen to levels comparable with the rest of the country.

Spotlight On Environment, Social, Governance

According to the National Oceanic and Atmospheric Administration, Massachusetts has more than 1,500 miles of coastline. The state's economic and population center in Boston, along with significant population and regional economic centers along and near the coastline, results in heightened environmental physical risk from storms, flooding, and sea-level rise. Its Municipal Vulnerability Preparedness (MVP) program assists municipalities in planning for and addressing these risks. However, municipalities are likely to face increasing budgetary pressure from implementing resiliency efforts and funding capital infrastructure projects to support adaptation measures.

Although Massachusetts has generally stable population trends and demographics, outside of the Boston MSA, municipalities could face pressure from declining or aging populations. Furthermore, although property tax rates are lower than in surrounding states, which helps keep housing costs more affordable, home prices are high in and around Boston, which could lead to some social capital risks for residents. The state has a demonstrated history of intervening to support financially distressed municipalities, which can help stabilize local government credit quality, but it is less formalized than in neighboring Connecticut and Rhode Island. Additionally, given somewhat poor pension plan governance at the local level, our view of an individual municipality's risk management, culture, and oversight governance risks could vary based on how local governments incorporate forward-looking planning and projections of pension and OPEBs into their operations. Our view of governance will vary by individual local government based on its unique circumstances.

Massachusetts Local Government Data

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