Fitch Lays Out “Strong” Outlook For State Governments

Mass. FY ’22 Revenue Surplus Nearing $1 Billion

Nationwide economic growth in 2022 might slow a bit from the “surprisingly strong 2021 underlying business conditions,” but state and local governments can still expect steady gains in tax revenues and should be able to continue to focus on building up reserves, the economists at Fitch Ratings said.

The credit rating agency published its 2022 outlook for state and local governments last week, predicting that the economy will not grow quite as fast as it has in 2021, but will “remain strong relative to the pre-pandemic trends, supporting steady gains in personal income, consumer spending and tax revenues” for Massachusetts and other states.

“Economic growth above trend and a significant boost in resources from federal stimulus will keep states and local government finances on a positive path in 2022,” Fitch Senior Director Eric Kim said. “Rising inflation and supply constraints will remain challenges.”

The outlook bodes well for the rest of fiscal year 2022, which ends June 30 and is already outpacing expectations for state tax revenue. It also suggests a positive start to fiscal year 2023, which is about to become a focus of attention on Beacon Hill.

State budget writers and Baker administration officials will huddle Dec. 21 to start mapping out what fiscal year 2023 might look like for state tax collections and spending during the annual consensus revenue hearing. The hearing typically includes testimony and projections from a variety of sources, like the Department of Revenue, Mass. Taxpayers Association, the Center for State Policy Analysis at Tufts and the economic analysts at MassBenchmarks.

Trying to forecast economic conditions and tax collections more than a year in advance is always a challenging and risky enterprise, but lawmakers and the executive branch now have to factor in the implications of a pandemic that waxes and wanes, the fundamental changes to the way people work and spend money, and the impacts of historic levels of federal aid.

The dire predictions that state revenue could be short by as much as $8 billion never came to pass and economic performance has greatly outpaced state expectations, at least as measured by tax receipts. Fiscal year 2021, which began about four months into the pandemic and ended as the economy mostly reopened, instead generated a surplus of about $5 billion for state coffers.

Now five months into fiscal year 2022, the Department of Revenue has collected approximately $13.612 billion from residents, workers and businesses — more than $2 billion more than in the same period of fiscal 2021 and $914 million more than what was expected to have been collected at this point in the budget year.

On top of the growth in tax collections, the federal government has sent approximately $113 billion in aid to Massachusetts state government, businesses and residents in response to the COVID-19 pandemic, including $4.8 billion in American Rescue Plan Act funds.

“Enormous federal policy support from the ARPA and widespread, rapid vaccination rollout boosted economic growth in the first half of 2021, and drove strong tax revenue collections,” Fitch said in its 2022 outlook for state and local governments. “While growth slowed in the third quarter, underlying business conditions for state and local governments remain solid. Job growth is picking back up, consumer spending continues to increase well ahead of pre-pandemic levels and household savings are historically high, suggesting ample liquidity.”

That third-quarter slowdown was “surprising,” Fitch said, but was driven by the same factors that remain the key risks for state and local governments going into 2022: supply chain challenges and a renewed COVID-19 surge fueled by a mutated variant of the virus.

“COVID-19 remains influential and unpredictable as transmission rates and hospital caseloads can shift rapidly. This makes the new Omicron variant a potential area of concern as a new pandemic surge could cause another economic setback, complicating governments’ budget outlooks,” Fitch said.

If there are economic or public health setbacks in 2022, Fitch said that states will be able to lean on their remaining pots of federal money to take some pressure off tax collections.

“The largely unspent infusion of federal aid in 2021 provides some fiscal cushion,” the outlook said.

Senate Ways and Means Committee Chairman Michael Rodrigues said last week that about half of Massachusetts’ ARPA money ($2.3 billion) remains in the segregated account the Legislature controls, but that no timeline has been established for taking “another bite at this apple.” ARPA money must be committed by the end of 2024 and spent by the end of 2026.

The credit rating agency also made clear that it will be watching as state governments put their one-time federal stimulus money to use, calling it “a key topic of 2022 state and local legislative sessions.”

“Sustainable deployment will be important to credit quality,” Fitch said. The firm added, “Rating implications will depend on whether governments can avoid fiscal cliffs — budgets built around non-recurring federal aid should be sustainable once it expires — and whether the aid can make material improvements in economic growth potential, such as through repairing or replacing critical infrastructure or acceleration of pandemic recovery.”

Colin A. Young/SHNS