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

NEW YORK--()--Fitch Ratings has assigned an 'AAA' rating to the following city of Cambridge, Massachusetts' (the city) general obligation (GO) bonds:

--$34,990,000 GO bonds municipal purpose loan of 2016.

Proceeds of the series 2016 bonds will be used to finance various city, sewer and school related projects. The bonds are expected to sell competitively on or around March 1.

In addition, Fitch affirms the 'AAA' rating for the city's outstanding GO bonds totaling approximately $384 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 presence of higher education, health care, and growing 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 notable growth in assessed value, and growth is expected to continue.

MODERATE DEBT LEVELS: Debt levels are moderate and expected by Fitch to remain so even with anticipated future debt. Principal amortization is rapid. Pension and other post-employment benefit (OPEB) unfunded liabilities and carrying costs are manageable.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and liquidity levels. 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 an estimated 2014 population of 109,694.

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 more than 20,700 people or 18.6% of the city's workforce.

Cambridge continues to experience employment expansion among companies in the biotechnology and life and sciences sectors, which currently employ more than 18,000 people. Leading biotech companies, including Novartis, Biogen Idec, Pfizer, Takeda/Millenium, and Sanofi/Genzyme, employ over 9,000 Cambridge workers. Several major software and internet companies have established research and development operations in Cambridge, including Microsoft, Google, Amazon, Facebook and EMC/VMware.

The city's well-diversified economy is characterized by a low December 2015 (preliminary) unemployment rate of 2.8%. Wealth levels are above-average; per capita personal income equals a high 141% of the national average.

Cambridge continues to increase its appeal as a magnet for research and development companies, ranging from startups to international companies. Commercial leasing activity has been strong, and companies have been expanding facilities. Assessed value (AV) performance reflects this activity, as well as growth in residential values. AV grew 15% in fiscal 2016 to $34.7 billion or an exceptionally high $316,000 per capita. This gain follows similarly solid growth of 11% in fiscal 2015 and 8% in fiscal 2014. Economic development districts located in the city continue to provide opportunities for current and future economic expansion. The city is projecting moderate increases in AV in fiscal years 2017 through 2020, which is considered realistic by Fitch based on new commercial and residential construction underway.

The city's 10 largest taxpayers account for an above-average 21% of the total tax base, but Harvard and MIT together total 9%. Most commercial property owners own multiple parcels with many different uses and tenants, providing considerable diversification of the city's property tax revenue base.

STRONG FINANCIAL PROFILE BOLSTERED BY AMPLE RESERVES

Exceptional financial management and planning are demonstrated by the city's strong financial position. The city prudently updates its five-year financial forecast each year to reflect changes in economic activity, helping to maintain moderate tax levy increases and a continued strategic use of its reserves. Reserve levels have consistently remained above-average. The unrestricted general fund balance at fiscal 2015 year-end was $273.7 million, equivalent to a strong 52.5% of spending.

The city experienced a $48.2 million operating surplus (9.3% of spending) after transfers for fiscal 2015, due to conservative estimates of non-property tax items and a substantial growth in building permit fees. Expenses also came in lower than estimated and helped avoid the use of reserves, which has typically been the city's experience. Property taxes generate the most general fund revenues and accounted for 65% of the total in fiscal 2015.

Cambridge's $193 million of certified free cash for fiscal 2015 (up from $161 million in fiscal 2014) is the largest amount in the city's history. The calculation of free cash, performed annually by the Massachusetts State Dept. of Revenue, is based on the city's financial statements prepared in accordance with Uniform Municipal Accounting System principles (which differ from GAAP). Free cash is surplus revenues less uncollected and overdue property taxes from prior years, and is an amount considered available funds for appropriation not required to be included in the annual tax levy.

The city's excess tax levy limit increased from $134 million in fiscal 2015 to $155 million in fiscal 2016, a 16% increase. This excess levy capacity totals 28% of the fiscal 2016 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 2016 operating budget of $546 million grew by a manageable 2.8% (compared to 2.9% in fiscal 2015), attributable to an increase in employee salary and benefit costs as well as a $2 million allocation to the city's OPEB trust fund. The tax levy increased by $13 million, or 3.8%, to $354.4 million and is being supplemented in part by the use of $11.5 million in free cash ($2.5 million to be used for technology projects). Management reports that fiscal year-to-date revenues are trending positively compared to budget and surplus results are projected for the year.

DEBT LEVELS MANAGEABLE; ADDITIONAL DEBT EXPECTED

Overall debt equals a moderate $4,561 per capita but is lower as a percentage of fiscal 2016 market value at 1.4%. The city plans to issue approximately $350 million of additional debt over the next four fiscal years. Debt levels are expected to rise only modestly given the city's rapid amortization rate; approximately 85% of debt is retired within 10 years. Furthermore, approximately 30% of the total additional debt is planned to be supported by user fees.

PENSIONS ARE ADEQUATELY FUNDED; OPEB LIABILITY REDUCED

The city is one of four employers participating in the Cambridge Retirement System. The city pays 100% of its actuarially determined contribution, equivalent to a manageable 4.2% of fiscal 2015 governmental spending. The fiduciary net position to total pension liabilities was 88% as of a Dec. 31, 2014 measurement date and the city's portion of the net pension liability was $122 million or a low 0.4% of AV value. Using Fitch's more conservative 7% return rate, the plan's assets to liabilities was estimated at 80%. The city paid $21.4 million towards OPEB contributions in fiscal 2015, which accounted for 48% of total OPEB costs.

The city's unfunded OPEB liability totaled $531 million as of June 30, 2015, and represented a moderate 1.5% of AV. City management created an OPEB trust fund in December 2009 and it has an actuarial value of $7.8 million as of June 30, 2015. Annual contributions of $2 million were made the past three fiscal years and are planned at $2 million for each of the next four fiscal years, based on the city's current financial forecast.

Total carrying costs for debt service, pension and OPEB pay-go equaled a manageable 15.2% of total fiscal 2015 governmental spending.

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

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999882

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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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Steve Murray
Senior Director
+1-512-215-3729
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com