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

NEW YORK--()--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.

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 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 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 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.

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 highly unlikely.

CREDIT PROFILE

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 revenues.

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 through 2017.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst:
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson:
Jose Acosta, +1-512-215-3726
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson:
Jose Acosta, +1-512-215-3726
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com