News Column

Fitch Affirms Cambridge, MA's GO Bonds at 'AAA'; Outlook Stable

January 31, 2014

Fitch Ratings has affirmed the 'AAA' rating for the City of Cambridge, Massachusetts' (the city) outstanding general obligation (GO) bonds totaling approximately $340 million . The Rating Outlook is Stable. SECURITY The bonds are general obligations of the city, payable from ad valorem taxes on all taxable property in the city, subject to statutory limitations. KEY RATING DRIVERS EXCEPTIONAL FINANCIAL MANAGEMENT: Management's conservative budgeting practices and prudent use of reserves has helped keep tax levy increases at moderate levels sufficient to cover general operating expenses. ABOVE-AVERAGE RESERVES AND LIQUIDITY: The city's positive financial profile is characterized by large reserves and ample liquidity. Additionally, the city's levy margin continues to grow favorably to the highest level in the city's history. ECONOMIC DIVERSITY PROMOTES STABILITY: The stable presence of higher education, health care, biotechnology, and life sciences industries supports the well-diversified economy with low unemployment and above-average wealth levels. NEW DEVELOPMENT PROMOTES TAX BASE GROWTH: Ongoing development within the city has resulted in growth in assessed value, providing the city with continued tax levy flexibility for operations and debt service. MODERATE DEBT LEVELS: Debt levels are moderate and expected to remain manageable, aided by the city's rapid rate of amortization. Pension and other post-employment benefit (OPEB) costs are manageable. RATING SENSITIVITY The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely. CREDIT PROFILE Cambridge is located in Middlesex County across the Charles River from the city of Boston and has a 2011 population of 105,792. DIVERSIFIED ECONOMY WITH STRONG SOCIOECONOMIC INDICATORS The city is an important economic component for the Boston metropolitan area and Massachusetts as a whole and benefits from the presence of both Harvard University and Massachusetts Institute of Technology . These institutions are the city's two top employers and employ approximately 19 percent of the city's workforce. Cambridge continues to experience employment expansion amongst companies in the biotechnology and life and sciences sector. Leading biotech companies, including Novartis , Biogen Idec , Vertex, and Genzyme , employ over 6,400 Cambridge workers. Several major software and Internet companies have recently established research and development operations in Cambridge including Microsoft , Google and VMware . The city's well-diversified economy is characterized by a low Nov. 2013 unemployment rate of 4.2 percent and a high per capita money income figure that equals 166 percent of the national average. Assessed value (AV) performance remains positive and at $27.2 billion for fiscal 2014 is up 7.7 percent compared to fiscal 2013. The city is projecting moderate increases in AV in fiscal years 2015 through 2018 which is considered to be realistic by Fitch based on new construction, appreciation in values of existing property and major rehabilitations. The city's ten largest taxpayers account for an above-average 22 percent of the total tax base, but Harvard and MIT together total 9 percent. Most commercial property owners own multiple parcels with many different uses and tenants, providing considerable diversification of the city's property tax revenue base. FINANCIALLY SOUND CITY WITH STRONG RESERVES Exceptional financial management and planning are demonstrated by the city's strong financial position. The city continues to strategically use general fund reserves to keep tax levy increases at moderate levels. Reserve levels remain strong. For fiscal 2013, the city experienced a $32.8 million operating surplus (7.2 percent of spending), after transfers, due to conservative estimates of non- property tax items. Expenses also came in lower than estimated helping avoid the use of reserves, which has typically been the city's experience. The city ended fiscal 2013 with an unrestricted general fund balance of $193.7 million , equivalent to a strong 42.5 percent of spending. The city has historically maintained an unassigned fund balance well in excess of the city's fund balance policy requiring an unassigned general fund balance equal to at least 15 percent of the ensuing year's budgeted revenues. Cambridge's $142 million of certified free cash for fiscal 2013 (up from $116 million in fiscal 2012) is the largest amount in the city's history. The city's excess tax levy limit increased from $104.1 million in fiscal 2013 to $117.5 million in fiscal 2014, a 12.9 percent increase. This excess levy capacity totals 23 percent of the fiscal 2014 operating budget. Fitch finds that Cambridge's substantial excess levy capacity under Proposition 2 1/2, along with its considerable reserve levels, provides the city with significant financial flexibility. The fiscal 2014 operating budget grew by a manageable 3.8 percent (compared to 2.9 percent in fiscal 2013), attributable to an increase in employee salary and benefit costs as well as the $2 million allocation to the city's OPEB trust fund. The tax levy increased by $11.6 million , or 3.66 percent, to $328.5 million and is being supplemented in part by the use of $9 million in free cash. Management has indicated that fiscal year to date performance has revenues trending positively compared to budget and is projecting surplus results for the fiscal year. DEBT LEVELS ARE MANAGEABLE Overall debt equals a moderate $4,296 per capita but is lower as a percentage of fiscal 2014 AV at 1.7 percent. Debt levels are expected to rise modestly given the city's manageable overall capital needs and rapid amortization rate; approximately 80 percent of debt is retired within 10 years. The city plans to issue approximately $319 million of additional debt over the next five years, including its $34.9 million series 2014 GO bonds planned for sale next month. Approximately 42 percent of the total additional debt is planned to be supported by user fees. PENSIONS ARE ADEQUATELY FUNDED; OPEB LIABILITY REDUCED The Cambridge Retirement System was 78 percent funded as of the Jan. 1, 2012 valuation date, a decline from higher levels in prior years. Using Fitch's more conservative 7 percent return rate, the plan was estimated at a more modest 70 percent funded. The city contributed $25 million for fiscal 2013 equal to 100 percent of its annual required contribution (ARC) and approximately 6.7 percent of spending. The city paid $22.7 million towards OPEB contributions in fiscal 2013 which accounted for 50 percent of total OPEB costs. The city's unfunded OPEB liability totaled $553 million as of June 30, 2013 , down from $611 million the prior fiscal year. The decline can be attributed to changes in employee health insurance contribution rates implemented by management. City management created an OPEB trust fund in December 2009 with an initial contribution of $2 million and has made annual contributions of $1 million in fiscal 2013 with expected $2 million annual contributions for fiscals 2014 through 2018. Total carrying costs for debt service, pension and OPEB pay-go equal a manageable 16.5 percent of total governmental spending. Additional information is available at ' '. In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates , S&P/Case-Shiller Home Price Index, IHS Global Insight , , and National Association of Realtors . Applicable Criteria and Related Research : --'Tax-Supported Rating Criteria' ( Aug. 14 , 2012); --'U.S. Local Government Tax-Supported Rating Criteria' ( Aug. 14 , 2012). Applicable Criteria and Related Research : Tax-Supported Rating Criteria report_frame.cfm?rpt_id=686015 U.S. Local Government Tax-Supported Rating Criteria report_frame.cfm?rpt_id=685314 Additional Disclosure Solicitation Status solicitation?pr_id=817634 ((Comments on this story may be sent to ))

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