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

NEW YORK--()--Fitch Ratings affirms its 'AAA' rating on the City of Boston, MA's (the city) following general obligation (GO) bonds:

--Approximately $152 million outstanding GO bonds (listed at the end of this release).

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city backed by its full faith and credit and unlimited taxing authority.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: Boston's history of sound operating results and maintenance of solid reserve levels is a reflection of management's prudent fiscal policies and conservative budgeting practices.

SOLID ECONOMIC UNDERPINNINGS: The city has a broad economic base and serves as New England's center for commerce, culture, and tourism. Unemployment rates remain below average and have trended below state and national averages the last seven years.

RECURRING REVENUES CONTINUE GROWTH: Property tax revenues, the city's primary revenue source, have increased each year as the city levies the full amount available pursuant to statutory limits under Proposition 2 1/2. Meals and hotel excise tax revenues continue to grow annually as the economy strengthens.

LOW DEBT LEVELS: Overall debt levels are low with above-average par amortization. Future capital and maintenance needs are high, but rely on state and federal support and are not likely to result in overly burdensome debt ratios.

STRONG ANNUAL FUNDING OF RETIREE COSTS: The city makes contributions in excess of pay-go towards its unfunded OPEB liabilities and fully funds its annual pension costs. A somewhat weak pension funded ratio should improve due to a fairly short amortization schedule.

GROWING FIXED EMPLOYEE COSTS: Growing salary and benefit costs will continue to drive the city's expenditure base and long-term liability position.

CREDIT PROFILE

SOLID ECONOMIC UNDERPINNINGS

Boston is the economic center of New England with its high degree of professional, financial, higher education and medical services. The city is also a popular destination for conventions and tourists, historically generating substantial excise tax revenue for the city.

The gradual rebound in the economy has resulted in improving local receipts from excise taxes, building permits, and property taxes; assessed values grew 8% last year following 4% growth in fiscal 2013. Development has picked up after a minor retreat during the recession with a significant number of commercial and housing projects in the pipeline. Housing prices have been on an upward trend since 2012 and rose 8.7% year over year through May 31, 2014.

UNEMPLOYMENT RATES ARE LOW; WEALTH LEVELS ARE MIXED

Unemployment rates have dropped to 5.1% in May from 6.9% the prior year reflective of job and labor force growth and are below the state's rate of 5.2% and national rate of 6.1%. However, wealth levels are below state averages with the city's median household and per capita income at 80% and 95% of state levels, respectively and 100% and 120% of national levels, respectively. The poverty rate was an above average 21.2% based on 2012 census results.

CONTINUED STRONG FINANCIAL PERFORMANCE

Management's prudent budgeting practices have contributed to Boston's historically sound operating performance and maintenance of strong reserves. The city experienced surplus results in fiscal 2013 as revenues continued to outperform expectations. The city's fiscal 2013 unrestricted general fund balance increased to $751 million from $690 million and represented a solid 29% of spending. The unassigned fund balance of $533 million is 21% of expenditures and exceeds the city's unassigned fund balance policy of 15% based on GAAP reporting.

Positive revenue variances were seen in the city's excise taxes, primarily from motor vehicle and hotel occupancy taxes, as well as license and permit fees and other departmental revenues. Strong revenue growth in these areas helped offset the negative public safety expense variance mostly due to the increase in overtime costs associated with the Boston Marathon bombing that occurred in April 2013.

The city's largest sources of revenues include property taxes (63% of total revenues), state aid (19%) and excise taxes (8%). The largest expenses are for schools and public safety, representing 34% and 21% of fiscal 2013 expenses, respectively.

FISCAL 2014 RESULTS PROJECTED TO BE POSITIVE

The city's fiscal 2014 budget reflected a 5.6% tax levy increase. Expenditures rose for teacher salary increases, pensions (+11.6%), and debt service (+12.5%). State assessments are up 11.6%, reflecting payments required to be made by the city to the Massachusetts Bay Transportation Authority (MBTA) and for charter schools. The budget also included $40 million appropriated from fund balance for its contribution to its other post-employment benefits (OPEB) similar to the amount budgeted for fiscal 2013.

The city has executed new contracts with a majority of its unions through 2016. Management has prudently established a collective bargaining reserve to cover proposed wage increases and the retroactive impacts of wage increases for fiscal years 2011 through 2015.

The city and the Boston Police Patrolman's Association received an arbitration award in September 2013 which included an increase in annual salaries of approximately 25.4% over six years. The award was funded by the city council in December 2013 and has since been executed. This award and the civilian settlements are in effect through 2016.

The city avoided arbitration and came to an agreement with Boston firefighters in May on an agreement that includes an 18.8% pay raise as well as new safety and management measures. The six year contract is estimated to cost the city $95.7 million and is retroactive from July 2011 and extends to June 2017.

Projected fiscal 2014 results show positive operations without using the $40 million in budgeted reserves for OPEB. Contributing to the projected positive results are a continued trend of excise taxes and building permits coming in over budget.

FISCAL 2015 BUDGET INCLUDES RECURRING REVENUE GROWTH

The total fiscal 2015 budget reflects a revenue increase of $118 million or 4.5% over the fiscal 2014 budget. The two largest sources of recurring revenue growth are property taxes and excise taxes. Property taxes were raised 4.5% or $79.6 million, which reflects the increase on existing properties allowed by Proposition 2 1/2 and new taxable value. Excise taxes are conservatively budgeted at 8% higher than the budgeted amount for fiscal 2014 but still less than fiscal 2013 actuals. Management continued its practice of funding OPEB costs in excess of pay-go and has appropriated $40 million of fund balance similar to fiscal 2014.

Expenditures were increased generally in all areas with the exception of health care costs as management has actively managed these costs the last three fiscal years through changes in insurance plans and implementation of higher co-pays for both employees and retirees. School Department costs are up 3.9% along with pension (+11.1%), debt service (+7.6%) and state assessments (+10.7%) reflecting an increase in charter school tuition costs passed through to the city.

Fitch believes the city will continue to manage responsibly and use reserves prudently as it has in the past and should benefit from a strengthening economy.

DEBT LEVELS ARE LOW

Overall debt levels remain low with debt per capita at $2,001 and debt to market value at 1.4%. Budgeted debt service in fiscal 2013 represents a manageable 5.7% of the budget. Par amortization is rapid at 70% in 10 years.

The city has a $1.9 billion five-year capital plan consisting of maintenance and upgrades to existing city infrastructure and schools as well as new facilities and major renovations for libraries, parks and community centers. The plan assumes $700 million in new borrowings over the next five years. Based on current debt levels the city's borrowing plans should fit comfortably within its conservative debt policy limits.

PENSION FUNDING COSTS PROJECTED TO RISE

The city continues its efforts to eliminate its large unfunded pension liability and plans to reach full funding by 2025, 15 years prior to the legally required funding date of 2040. The city has historically made 100% of its actuarially-based annual required contributions (ARC). The city's annual pension costs for fiscal 2014 were $153 million up from $137 million in fiscal 2013. The city has budgeted $170 million for fiscal 2015.

The plan was 71% funded as of Jan. 1, 2012 (excluding teachers) and the unfunded liability was $1.48 billion, or 1.5% of market value. This valuation reflects the decline in the city's investment rate of return to 7.75% from 8%. Using Fitch's more conservative 7% investment rate of return the plan is estimated to be funded at a slightly weak 65%.

CITY CONTINUES TO OVERFUND OPEB; HIGH UNFUNDED LIABILITY

The city has made annual appropriations over and above pay-go costs since fiscal 2008 to support future OPEB costs. Trust fund assets for the benefit of the city and Boston Public Health Commission (BPHC) retirees were $272 million as of Dec. 31, 2013. The total city and BPHC unfunded OPEB liability totals a high $2.1 billion as of June 30, 2013, but this amount is down considerably from the $3.1 billion valuation as of June 30, 2011. The decrease is due to health benefit changes negotiated with its unions, a state-mandated requirement that retirees enroll in Medicare when eligible and increases made in plan co-pays. Total contributions of $166 million budgeted for fiscal 2015 equal a noteworthy 99% of the ARC.

Total carrying costs for debt service, pension and amounts paid towards OPEB are moderate at 14.4% of fiscal 2013 total governmental spending.

Outstanding city bonds affirmed at 'AAA':

--GO bonds series 2004A;

--GO bonds series 2005A;

--GO bonds series 2006A;

--GO bonds series 2007A;

--GO refunding bonds series 2007B;

--GO bonds series 2008A;

--GO bonds series 2008B.

Additional information is available at 'www.fitchratings.com'.

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, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840948

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Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1 212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Committee Chairperson
Arlene Bohner
Senior Director
+1 212-908-0554
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1 212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Committee Chairperson
Arlene Bohner
Senior Director
+1 212-908-0554
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com