Feb 12 - Fitch Ratings assigns a 'AAA' rating to the following City of
Cambridge, Massachusetts (the city) general obligation (GO) bonds:
--$65,260,000 GO bonds, municipal purpose loan of 2013.
The bonds are scheduled to sell via competitive sale on Feb. 19. Proceeds will
be used to support various sewer, school and municipal projects.
In addition, Fitch affirms the 'AAA' rating on the city's outstanding $328
million GO bonds.
The Rating Outlook is Stable.
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 while the city faces growing employee-related costs.
ABOVE-AVERAGE RESERVE AND LIQUIDITY LEVELS: 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
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 CONTINUES: Ongoing development within the city is projected to
promote growth in assessed value (AV), providing the city with 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 amortization rate.
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 highly unlikely.
Cambridge is located in Middlesex County across the Charles River from the city
of Boston and has a population of 105,162.
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 with a combined workforce of 19,000.
Cambridge continues to experience employment expansion amongst companies in the
biotechnology and life and sciences sector. Leading biotech companies, including
Novartis, Biogen Idec, Vertex, Pfizer Millenium and Genzyme, employ over 8,500
Cambridge workers. Several major software and Internet companies have recently
established research and development operations in Cambridge including
Microsoft, Google and VMware.
Cambridge continues to be recognized for its high level of venture capital
investment which totaled $305 million during the third quarter of 2012, as new
ventures are attracted to Cambridge's highly skilled work force, urban setting
and proximity to cutting edge companies and research institutions.
The city's well-diversified economy is characterized by a low Nov. 2012
unemployment rate of 3.8% and a high per capita money income figure that equals
over 166% of the national average. Assessed value performance remains positive
and up 3.1% in fiscal 2013 from the prior fiscal year. The city is projecting
moderate increases in AV in fiscal years 2014 through 2016 based on new
construction, appreciation in values of existing property and major
rehabilitations, which is considered to be realistic by Fitch.
Numerous economic development projects are underway or in the planning stages
and include expansions to existing corporate facilities and new offices or labs.
The city's 10 largest taxpayers account for an above-average 20% of the total
tax base, but Harvard and MIT together total close to 10% and 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, including debt stabilization funds, to keep tax levies at moderate
levels. Reserve levels remain strong. For fiscal 2012, the city experienced a
$19.7 million operating surplus (4.4% of spending), after transfers, due to
conservative estimates of non-property tax items. Building permits, notably,
were higher as a result of new university and bio company projects. . 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 2012 with an unrestricted general fund balance (committed,
assigned and unassigned) of $161 million, equivalent to a strong 36% 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% of the ensuing year's budgeted revenues.
Cambridge's $116 million of certified free cash for fiscal 2012 (up from $102
million in fiscal 2010) is the largest amount in the city's history. Fitch also
notes 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 city's $104 million excess levy capacity totals 21%
of the fiscal 2013 operating budget and is up by $2 million from a year prior.
The fiscal 2013 operating budget grew by a manageable 2.9% (compared to 1.8% in
fiscal 2012), attributable to an increase in employee salary, health insurance
and pension costs. The tax levy is up 6% over the prior year and is being
supplemented by the use of $9 million in free cash, the school debt
stabilization fund ($0.6 million), $8.5 million from the Health Claims Trust
Fund, and $2 million from overlay surplus. Management has indicated that fiscal
year to date results are trending slightly better than estimated due to
continued new development and increases in building permit and excise tax
DEBT LEVELS ARE MANAGEABLE
Overall net debt equals a moderate $4,515 per capita but is lower as a
percentage of fiscal 2013 AV at 1.9%. Debt levels should remain manageable given
the city's modest overall capital needs and rapid amortization rate;
approximately 81% of debt is retired within 10 years. The city plans to issue
approximately $225 million of additional debt over the next four years, with
approximately 45% to be supported by user fees.
PENSIONS ARE WELL-FUNDED
The Cambridge Retirement System was 78% funded as of the Jan. 1, 2012 valuation
date, a decline from higher levels in prior years. Using Fitch's more
conservative 7% return rate, the plan was a more modest 70% funded. The city
contributed $30.7 million for fiscal 2012 equal to 100% of its annual required
contribution (ARC) and approximately 6.7% of spending. The city paid $22.5
million in pay-as-you-go other post-employment benefit (OPEB) contributions in
fiscal 2012 which accounted for 46% of total OPEB costs. The city's unfunded
OPEB liability totaled a high $611 million in fiscal 2012 (2.4% of AV) and 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 an expected $2 million annual contribution for fiscal 2014
Management recently negotiated new employee contracts with a majority of its
bargaining units and has increased the employee contribution amounts for health
insurance premiums for both union and non-union employees which should help
result in a lower future OPEB liability for the city.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
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, Zillow.com, 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
U.S. Local Government Tax-Supported Rating Criteria