News Column

Bond rating highest in city history

August 17, 2014

By Douglas Moser, The Eagle-Tribune, North Andover, Mass.

Aug. 17--METHUEN -- Credit rating company Standard & Poor's has boosted the city's credit rating to AA just ahead of a major bond issue to pay for the recently completed high school renovation, a change that could save the city tens of thousands in interest payments.

City officials said the new rating, the highest in the city's history, will save a considerable amount of money in interest payments as the city is ready to sell a round of $10 million in bonds towards its share of the $98 million high school project.

"This bond rating shows that Methuen is dedicated to fiscal responsibility and poised for future growth," Mayor Stephen Zanni said.

City Auditor Thomas Kelly said the rating will save tens of thousands of dollars on $38.5 million in total bonds the city will issue for the high school project.

The new rating also makes the city's debt eligible for a state program called the Qualified Bond Act, which means the state will back those bonds with the city's state aid and shaves between a half percentage point and a full percentage point off the interest rate of city bonds.

The extra bonds will not affect the tax rate, Kelly said, because the debt the city issued to pay for renovations to its grammar schools will be paid off in the 2016-17 budget, the same time the high school debt begins repayment, meaning debt payments will remain constant with the exception of the 2017 budget. That year will be the first a payment is due on the high school bonds and will be the final year to pay on the grammar school bonds, and the $200,000 jump in debt due will come out of the stabilization fund, Kelly said. But debt payments will drop again in 2018.

Kelly said Standard & Poor's gave the rating after evaluating the city's growing economy, its financial and debt situation, and its budgeting practices, which included refraining for using savings to pay for the annual budget over the last several budgets.

"It's an exciting time for the city," Kelly said. "We're strong. We had a couple rough years there, but it shows we're moving in the right direction."

The city had an A1 rating for years, a rating used by Moody's which is three steps down from Standard & Poor's AA rating, but that also included a negative outlook notation because the City Council regularly used savings to plug holes in its normal budget.

"Every time dealt with a credit agency, that would come up, that we relied too much on reserves to balance the budget and that's not a good thing to do," Kelly said.

The reserves were not low, he said, but "they were right, that's not a proper use of it."

Kelly and the City Council's finance committee, which reviews the budget and makes recommendations to the full council, urged the council to stop using reserves not only to boost the bond rating, but also to keep money aside to pay for the high school project.

Councilor Lisa Yarid Ferry, chair of the finance committee, said she had tried to hold the line against using reserves since she was first took office in 2012. "I don't know that it's a battle, but it's always on the table," she said. "I'm adamantly opposed to touching that money for anything but financing Methuen projects."

And in 2012, the council passed a .75 percent meals tax that feeds about $700,000 into the reserve fund every year. Currently, the city has about $1.4 million in the reserve account, a total expected to grow to $3.3 million when the high school bonds begin repayment in 2017, Kelly said.

"Then it keeps growing and they really like that," Kelly said. "It's our way of showing we're making commitments to increase the reserves."

On top of all that, the economic and development outlook for the city has improved, Kelly said.

Zanni said he hopes the increasing reserves and stable debt will lead to a top AAA rating in the near future.

This year's bonds will carry interest just under 3 percent, which Kelly said is very good.

Last year, Moody's removed the negative outlook, but dropped the overall rating a notch to A2, which was still a prime rating but carried a higher interest rate.

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Source: Eagle-Tribune (North Andover, MA)

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