A soon-to-be released report by the John F. Kennedy School of Government says that recent credit rating upgrades in Massachusetts have saved taxpayers more than $540 million in interest cost savings.
The $540 million figure represents the calculated gross savings caused by the upgrade. The report says that the state has saved $362 million in present-value debt service savings over the past three years and an additional $178 million in other savings attributable to the better ratings.
The report was written by Dall W. Forsythe, formerly a professor at the school and now a managing director at Lehman Brothers. Two of Forsythe's students, Peter Fishman and Theodore Paris, are co-authors of the report.
Forsythe said the study is the first to give a dollar amount to the value of an upgrade.
"The goal of this essay is to show that the financial benefits of a program of fiscal improvements can in fact be calculated with some degree of precision," Forsythe said. The findings "will allow elected officials and taxpayers to take those benefits into account when making decisions about a state's budget and debt policy."
The findings in the report come at a good time for Massachusetts Gov. William F. Weld and state Treasurer Joseph D. Malone, both of whom are up for re-election this fall.
When Weld succeeded former Gov. Michael S. Dukakis in 1991, the state was rated Baa by Moody's Investors Service, BBB by Standard Poor's Corp., and A by Fitch Investors Service. Massachusetts had the lowest state credit ratings in the nation.
Since Weld and Malone have been in office, the state's rating has risen to A-plus from Standard & Poor's and Fitch and single-A from Moody's.
As an indication of the credit's weakness, the report said that the last financing undertaken by former Treasurer Robert Q. Crane in late 1990 was priced with yields 140 basis points through the market.
To compile the figures for the report, Forsythe used the market reports prepared every day for the state by Delphis Hanover Corp., a Connecticut-based municipal research company.
When Weld took office, he assembled a team of professionals whose main purpose was to improve the state's rating. Included in that team was the former secretary of administration and finance, Peter Nessen; deputy treasurers Eric Turner, Kenneth Olshansky, and Thomas Trimarco; and former state debt managers James B.G. Hearty and Christopher Alberti.
"Nessen was in charge of convincing the ratings agencies that the state was on the right track," said one municipal analyst. "Hearty and Olshansky, and later Chris Alberti, made sure the state got the best deals for the state."
Alberti succeeded Hearty as debt manager when Hearty joined Lehman Brothers' Boston office as a senior vice president.
"All I did for the first six months was say no to people," Hearty said. "Once we got the budget balanced and a better idea about how bad things really were, we could proceed with convincing the ratings agencies we were on the right track."
Hearty said that when the new administration took office there was no capital planning program, no credibility in the market, an unbalanced budget, and an out-of-control balance sheet.
He said once these concerns were addressed, Weld's staff and other state officials could go to the rating agencies and start planning financings.
"We've worked very hard to improve the fiscal management within the commonwealth because that's what we were elected to do," Malone said on Friday. "We're particularly pleased that an objective study has quantified our savings in real dollars."
Olshansky said that it has been a priority since "the first days of the administration to address the state's problems in the market and fix them."
The municipal analyst said the state was damaged in the late 1980s not only by the struggling economy but by the perception that nothing was getting done to resolve the problems.
"Pursuing the aggressive refundings was a part of how we were able to get the upgrade," Nessen said on Friday. "But it was also an essential part of the upgrade that we instilled a better sense of confidence from investors."
Nessen said that without the coordinated leadership of Weld and Malone, the upgrades would have never occurred.
The report said the $540 million figure was a conservative estimate and did not include the savings generated through the state's use of taxable bonds, capital appreciation bonds, or variable-rate debt.
"As the case of Massachusetts demonstrates, the value of sound fiscal management is calculable and substantial," the report concluded. "Those benefits should be taken into account when governors and legislatures make decisions about budgets and debt policy."
