The Public Policy/The Massachusetts Debacle
Mysak, Joe
THE PUBLIC POLICY THE MASSACHUSETTS DEBACLE S alesmen at one brokerage house last year were exhorted over the company's public address system, "This may be your last chance to sell Massachusetts...
...Nonetheless, the agencies reaffirmed their ratings, and one of their analysts told the New York Times that he felt "the debt load is quite manageable...
...The commonwealth's deficit continued to grow, as did voter and legislator dissatisfaction...
...Either way, it will be a long time before we see Massachusetts at doubleA-plus again...
...Such was one effect of Proposition 21/2, passed in 1980 to rein in property taxes...
...Asked whether politics could have anything to do with the agencies' inexplicable silence, they denied it absolutely...
...THE PUBLIC POLICY THE MASSACHUSETTS DEBACLE S alesmen at one brokerage house last year were exhorted over the company's public address system, "This may be your last chance to sell Massachusetts bonds with a double-Aplus rating...
...Let's face it: analysts come to the table with a certain amount of, ahh, baggage," an official at one of the agencies told me...
...Yet another possibility presents itself...
...The gist of it was that the rating agencies had been playing politics...
...for Massachusettswill take place on the tax front, with the sides lining up predictably...
...Several leading analysts offered criticism in their firms' municipal-market newsletters, one going so far as to refer to the Journal's editorial as "claptrap...
...There are a lot of feelings of anger and betrayal that one, he lost, and two, that in the process of running he covered up a fiscal situation that could have been manageable 15 months ago and has now spiralled into a crisis," Marjorie P. Claprood, a Democratic state representative, told the New York Times about the Massachusetts mess...
...This clears up the last dark cloud on the fiscal horizon," said Frank Keefe, then the commonwealth's secretary of administration and finance...
...That was followed by Moody's and Standard and Poor's raising their ratings on the state's debt to Aa and double-A-plus, respectively...
...In response to the editorial, the bond community, and in particular the community of municipal analysts, with few exceptions, closed ranks...
...And the state is now cutting aid...
...And so it has proved to any investor who bought the commonwealth's bonds because of their solid reputation with analysts, especially at the rating agencies, before 1989...
...Buddy Roemer of Louisiana explained the situation: "A good reputation will take you a long way," he said...
...Massachusetts, at least as far as bond buyers go, might turn out to be the Louisiana of the 1990s...
...By midsummer, the commonwealth had been to the short-term debt market four times, selling notes to ride out budgetary troubles, and even descended to writing "hot checks" to cover itself...
...And as the state goes, so go many of its localities, dependent as many of them are on state aid...
...I took up the challenge: 'Yes,' I said, 'if your criterion for greatness is being able to run the city into the ground.' " If politics was not at work, one might place credence in the tale of an agency official, full of a certain perniciousness and arrogance, who told one of my sources in early 1988, "We can't downgrade Massachusetts...
...we only judge from the evidence at hand...
...Dukakis never made it to the safety of the other side of the Potomac and now faces another long year as a lame duck...
...But there is a certain amount of evidence for it...
...There seemed to be something more atwork here than a simple overestimation of tax revenues: New York and California both had managed fairly robust comebacks by now...
...In the three-handed compact drawn between issuer, rating agency, and investor, lower ratings translate into the higher yields that those who sell bonds must offer to those who buy them...
...During the summer, the state estimated it had a $450 million shortfall, and the candidate scrambled to get his own house in order even as he was on the campaign warpath...
...As my local official friend observed, "It will cost us about a quarter-point more to borrow...
...It is only a historical footnote to the election of 1988, but an important one for those who care about Wall Street's political leanings, and about how keeping mum can have dire effects...
...No matter how badly Massachusetts fared during the election year, they were not about to hurt Michael's by Joe Mysak chances by downgrading his state...
...Louisiana, rated at Baa-1 by Moody's Investor Service and triple-B-plus by Standard and Poor's Corporation, is the lowest-rated state bond issuer, the victim of bad politics and worse crude oil prices...
...Downgradings are more than a blow to prestige...
...John Fund of the Wall Street Journal, who had tormented Dukakis throughout the presidential campaign with a series of editorials on the commonwealth featuring a logo of the state surrounded by dancing question marks, turned out an editorial at the end of August entitled, "The Last to Know...
...The agencies, beginning in May 1989, finally reacted and, in an unprecedented and unseemly frenzy to make up for their past dilatory behavior, cut the commonwealth's debt —including bonds, notes, and commercial paper—no fewer than seven times...
...She sat down to lunch, and immediately declared that the last good mayor of New York City was John Lindsay...
...Joe Mysak, The American Spectator's chief saloon correspondent, is the managing editor of the daily Bond Buyer...
...Beset by a deficit resulting from dreamy tax revenue calculations, fiscal mismanagement, and political paralysis, the commonwealth is now rated just a cut above the Pelican State...
...The Duke went down in flames...
...Just under 40 percent of our budget comes from the state...
...first, a bit of history...
...Michael Dukakis signed legislation authorizing "a comprehensive reform and funding plan" designed to eliminate the commonwealth's $10 billion unfunded pension liability...
...The dark clouds quickly returned, and Governor Dukakis apparently ran out of the magic his predecessors had used in creating the Massachusetts miracle...
...It has climbed steadily, as Dukakis and, his few remaining loyalists put forth package after package of spendingcuts, tax increases, and revenue raisers (including one measure designed to pull in uncollected bottle deposits), and the commonwealth's legislature bats them down...
...By October, the deficit was estimated at a chronic and apparently ineradicable $450 million and climbing...
...We just upgraded them a few months ago...
...But that may change very soon, as the commonwealth grapples with its deficit...
...In January 1988, Gov...
...Editorialist...
...And unfortunately for the Duke, local pals started complaining that state spending, and tax increases, were at fault...
...To imagine a full-fledged conspiracy of silence does require a certain leap of faith...
...But the amazing thing about the downgradings that occurred in 1989, and those that are undoubtedly still to come, is not that they are taking place at all but how long it took for them to be made...
...And since May 1988, Massachusetts has sunk with startling alacrity in the eyes of analytical beholders...
...Sure, I expect us to be downgraded," said the mayor of one small Massachusetts city...
...34 THE AMERICAN SPECTATOR JANUARY 1990 In November, the state revenue advisory board estimated the state's budget deficit at $700 million...
...He reasoned that the agencies did not respond to the commonwealth's red ink because their analysts were liberals who favor big-spending governments, and Mike Dukakis was their man...
...The rating, needless to say, remained intact...
...In late November, Moody's cut Massachusetts to Baa-1 while Standard and Poor's put it on its CreditWatch list with "negative implications," threatening to cut its A-rating to triple-B, the basement...
...At the root of the deficit in Massachusetts, as earlier in New York and California, were taxpayer responses to changes in federal tax laws...
...Shortly before the election, I dined with a few top dogs at one of the agencies...
...N of everyone, however, was willing to let them off the hook so quickly...
...With a budget deficit amounting to more than $700 million, it may soon have the lowest-rated honor all to itself...
...It seemed a reasonable move...
...The question remains, however, as to just how far it should take you...
...An analyst who was there recalls, "When I heard it, I didn't think it was because they were going to be upgraded to triple-A anytime soon...
...The next battle...
...The left is clamoring for tax increases rather than "human sacrifices," in the words of Globe columnist Bob Kuttner, while everyone else contends that taxes have already been raised enough, and that instead tax credits should be used to encourage investment...
...Journalists, of course, know nothing of the entrail-reading analytical process...
...One portfolio manager got a look at this baggage first-hand, meeting with an agency analyst at an industry function...
Vol. 23 • January 1990 • No. 1
