On Massachusetts’ $2.6 Billion Special Obligation Revenue Bonds (“Covid-19 Recovery Bonds”)

September 26th, 2022

Did Massachusetts Allow Bankers and Wealthy State Residents To Profiteer Off The Unemployment Insurance Debt?

By Max Rottersman

A provocative question! But when you don’t get answers from your State representatives, Marjorie C. Decker or State Senator, Patricia D. Jehlen (who was intimately involved with the bond issuance), what is one to do? State Treasure Deborah B. Goldberg was also less than forthcoming.

My back of the envelop calculations suggest ~$160 million is in question; that is, part of that may be hidden tax breaks for some and lost State services for others.

A month before Covid-19 shut down Massachusetts, the state had $1.7 billion saved in its Unemployment Insurance Trust Fund, an account held by the United States Treasury (UST). By the summer of 2022 Massachusetts owed $2.94 billion.

In normal times, states pay into the system from UI taxes and pull out for payments. In recessionary times states can end up withdrawing more money than saved. In that case, the UST will lend money to the states, at close to the Fed funds rate, to pay the claims.

If a State begins to owes money its UI tax rate goes up, both to pay down the debt and meet payments. The UI account is something like a credit card, the formula for tax-rates (minimum payments) motivate a state to pay the card off sooner than later. The State is free to deposit money into their Treasury account at any time. States are charged interest when the debt ages.

In August, 2022, Massachusetts sold bonds at around 3.6% interest, with close to a 10-year time span, and paid it off its UI debt at 1.56% interest.

It begs the question, which is a better deal for MA workers. Pay higher UIT taxes and pay the UST over 3-7 years (where rates can rise or fall) or borrow today and pay a locked-in rate of 3.6% over 10 years?

Did Massachusetts lawmakers fully address the following issues?

I want to be clear. Issuing bonds to pay of the U.S. Treasury debt might be the “best” approach. However, shouldn’t we model the differences in interest and fee costs for both?

Even if the bonds are more expensive, there may be other factors that make them the right strategy. Perhaps it is important to keep bankers happy in Massachusetts. Perhaps interest rates will rise in a fashion that the bonds become cheaper than the U.S. Treasury (though that is market timing). Anyway, these are complicated issues.

What worries me the most is the short shrift given to transparency and good governance. The fact that the prospectus is locked from copying tables into a spreadsheet, for example. Why is the MA Treasury less transparent than the U.S. Treasury?

There’s something very closed-door about the way the MA financial heads and legislators decided to issue bonds. There is tons of transparency on a separate issue, the calculation of tax rates, and nothing on the simple question of the debt’s cost to workers. As I mentioned above, bonds favor wealthy workers and though there is much discussion about improving the equity of UI tax rates, I did not see that issue addressed.

Further, my questions to various MA departments and legislatures were answered by assistants who did not seem qualified to answer the questions.

You can read the documents on this subject, released by MA here.