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MOODY'S ASSIGNS A1 UNDERLYING AND Aa2 ENHANCED RATINGS TO CITY OF LOWELL'S (MA) $8 MILLION GO STATE QUALIFIED RZED BONDS; OUTLOOK IS STABLE

06 Dec 2010

LONG-TERM A1 RATING APPLIES TO $166 MILLION OUTSTANDING GENERAL OBLIGATION DEBT; ENHANCED RATING OF Aa2 WITH STABLE OUTLOOK ALSO APPLIES

Municipality
MA

Moody's Rating

ISSUE

UNDERLYING
RATING

RATING

General Obligation State Qualified Recovery Zone Economic Development Bonds (Federally Taxable--Direct Payment)

A1

Aa2

  Sale Amount

$8,000,000

  Expected Sale Date

12/07/10

  Rating Description

General Obligation

 

Opinion

NEW YORK, Dec 6, 2010 -- Moody's Investors Service has assigned an A1 underlying rating and a Aa2 enhanced rating to the City of Lowell's $8 million General Obligation State Qualified Recovery Zone Economic Development Bonds (Federally Taxable-Direct Payment). Concurrently, Moody's has affirmed the city's A1 long-term rating and stable outlook, affecting roughly $158 million in outstanding long-term debt. All of the city's rated outstanding long-term debt is authorized under the Commonwealth of Massachusetts' Qualified Bond Program (QBP), which is rated Aa2 with a stable outlook.

The bonds are issued to finance the purchase and installation of energy-saving building fixtures and systems throughout the city's general government and school facilities. The city has entered into a contract with Ameresco, Inc. guaranteeing future savings in utility costs related to the fixture installation with partial utility expenditure reductions anticipated in the current fiscal year, however significant savings, net of debt service, are not expected until fiscal 2015 when the project is complete. The bonds are general obligations of the city and are not legal obligations of the vendor.

RATINGS RATIONALE

The A1 long-term rating and stable outlook reflect the city's narrow financial position, which is expected to remain strained in the near term as state and local revenues decline and significant expenditure reductions are implemented. The rating also incorporates the expectation that city's financial position will improve in the medium term as recently-adopted financial policies are implemented, as well as the city's sizeable and diverse tax base and manageable debt profile.

QUALIFIED BOND PROGRAM PROVIDES ENHANCED SECURITY; GROSS DEBT SERVICE PAID BY STATE TREASURER

The Aa2 rating and stable outlook assigned to the Commonwealth of Massachusetts' Qualified Bond Program reflects the inherent strength of the direct-pay arrangement authorized by state statute by which the State Treasurer makes gross debt service payments on qualified bonds and notes directly to a state-approved paying agent. The State Treasurer then withholds an amount equivalent to the debt service payment from the local unit's quarterly state aid payments. The city will apply semi-annually to the federal government for the payment reflecting the 45% interest subsidy under the Recovery Zone Economic Development program, which will be paid directly to the city. The interest payments are not pledged to pay the bonds. Moody's believes that the program's proven history of timely payments, sound mechanics and Lowell's strong 5.7 times (projected for fiscal 2011) coverage levels provide sufficient funds for timely debt service payments. The qualified bond program rating is linked to the Commonwealth of Massachusetts' strong general obligation credit rating of Aa1 with a stable outlook.

EXPENDITURE CUTS OFFSET DECLINE IN STATE AID REVENUES

Lowell's financial position is expected to remain stable, albeit with slim reserves, in the medium term. The city's effective management team continues to implement cost-saving strategies and prudent expenditure reductions to produce balanced operations in the general fund and enterprises. Revenue growth and flexibility remain limited, compounded by Lowell's dependence on state aid, which represented 59% of annual revenues in fiscal 2009. Operations in fiscal 2009 were challenged by a $3 million mid-year reduction in state aid and a $2 million snow removal deficit; due primarily to the elevated snow removal costs, the city received a negative free cash certification of $490,543. Mid-year budget adjustments in fiscal 2009 included partial deferral of the snow deficit to fiscal 2010 and personnel reductions, including 118 layoffs and retirements. A modest $500,000 was appropriated to the city's stabilization fund, which had been essentially depleted for over 25 years, due to the release of unspent capital appropriations. Available reserves, including the unreserved general fund balance and stabilization fund, totaled a modest $1.1 million, 0.4% of general fund revenues. The fiscal 2010 budget included an expenditure reduction of roughly 4%, which resulted in significant expenditure reductions city-wide. Draft financial statements for fiscal 2010 indicate favorable, but modest, variances in revenues and expenditures and modest improvement in general fund balance and free cash. Favorably, no free cash or stabilization funds were appropriated to balance the budget and a relatively mild winter resulted in a smaller snow removal deficit of $1.3 million, which the city covered through interdepartmental transfers, partially relieving pressure on fiscal 2011 operations.

The budget for fiscal 2011 is also extremely lean and includes a state aid reduction of $4.6 million from the fiscal 2010 budget. A very modest 0.7% expenditure increase is included, and the budget was balanced without the use of reserves. Roughly 20 layoffs are expected in the school department, although Lowell was able to balance the fiscal 2011 budget without general government layoffs. Additional savings may be possible if the city adopts a recently-enacted statewide provision allowing extension of its pension funding schedule to 2040. Notably, the city did not reduce its comfortable $4.96 million property tax levy capacity and has stabilized general fund operations by establishing self-supporting enterprise funds for the water system and parking operations. Additionally, the city transferred ownership of the Paul Tsongas Arena to the University of Massachusetts and other than a small debt service payment, will not have to subsidize arena operations in the future. The city anticipates another state aid cut of roughly $7 million in fiscal 2012, a reduction 5% from the fiscal 2011 budget, primarily from the schools' state aid.

Lowell's management team regularly updates long-range financial forecasts, all guided by comprehensive financial policies incorporated in annual budgets since fiscal 2009. The most recent updated five-year financial plan includes conservative assumptions for revenue and expenditure growth. While the 2011 budget is balanced, funding future budgets without drawing on levy capacity is currently projected to result in multi-million dollar budget gaps through 2015. It is not clear, however, how much additional tax burden can be supported without discouraging economic expansion. The city is $4 million above the commonwealth's required minimum funding level for the school system which could provide flexibility in future budgets. Management continues to explore opportunities for efficiency, including departmental consolidation and regional service provision, although significant savings in the near term are unlikely. Despite recent improvements in fiscal management, the city's financial flexibility may remain strained in the medium term due to a prolonged economic recession. Additionally, no provision for significant replenishment of reserves is included in the current forecast. The city's ability to generate budget surpluses and replenish reserves will remain a critical rating factor going forward.

REDEVELOPMENT ACTIVITY CONTINUES; MODERATE DECLINES IN TAX BASE VALUATION

Although significant potential for economic expansion and redevelopment exists in Lowell, the city's $8.1 billion tax base is expected to experience relatively mild weakness in the short term. Annual tax base growth, which had averaged 10.3% since 2004, has reversed, with declines of 6% and 9.1% in fiscal 2009 and 2010, respectively. Fiscal 2011 assessed valuations are expected to experience another moderate decline of roughly 4%, based on market conditions as of January 1, 2010. However, city officials report some improvement in housing values and relatively stable commercial and office vacancy rates. Prior years' growth incorporated regional market value appreciation as well as significant commercial redevelopment efforts in this mature urban center. Approximately $140 million in private residential investment has revitalized the downtown area, leveraging favorable commuter rail and highway access at the crossroads of the Route 3 and I-495, and the recently completed state-funded Route 3 expansion has improved vehicular access to the city. Site preparation has begun in the Hamilton Canal District where a planned multi-use development is expected to add $395 million in taxable value, with a projected $6.5 million in additional tax revenues available annually, at the conclusion of its 10-year build-out in approximately 2018. New development activity was healthy in fiscal 2010 with new growth revenue of $2.2 million, on par with the previous five-years' average of $2.35 million, but lower than the fiscal 2005 value of $3.3 million. Building permit activity in 2009 remained steady at $91 million, down from the peak of $164 million in 2007 and under the five-year average of $103 million. The city benefits from a large institutional presence with higher education facilities (including the 12,000-student University of Massachusetts-Lowell campus), hospitals and government facilities. Equalized value per capita is satisfactory at $66,860, but below the US median of $89,356 and the commonwealth median of $160,704. Wealth and income levels remain below state and national medians, due in part to the student population.

SATISFACTORY DEBT BURDEN WITH FUTURE ENTERPRISE BORROWING PLANNED

Moody's anticipates that Lowell will continue to maintain a manageable debt burden (2.2% of equalized value) given limited near-term borrowing needs, debt service support from enterprise funds and a history of substantial support from the commonwealth for school projects. Although the city has a moderate amount of debt outstanding, approximately 50% of total debt is associated with the significant $200 million school facilities program undertaken over the last decade that the commonwealth reimburses at a rate of 90%. The adjusted debt position falls to 1.8% of equalized valuation after accounting for school construction reimbursement. While debt service claimed an above average 7% of General Fund expenditures in fiscal 2009, outstanding obligations are amortized at a reasonable rate of 61.4% within 10 years, leaving sufficient capacity for future borrowing. The city is re-evaluating its capital improvement program in light of the economic downturn and is likely to defer major capital improvements, outside of proposed modest borrowings to finance an additional purchase of energy-saving fixtures and enterprise-supported combined sewer overflow work and vehicle replacements.

Of the city's $101 million in authorized but unissued debt, approximately $33 million has been approved for water and wastewater system improvements, including ongoing combined sewer overflow separation projects. The city is expected to continue to leverage favorable borrowing terms through the commonwealth's Massachusetts Water Pollution Abatement Trust revolving fund (rated Aaa/stable outlook). The wastewater debt is expected to be fully supported by wastewater enterprise revenues. Approximately $16 million of the authorizations represent school projects. Under the Massachusetts School Building Authority's (MSBA sales tax bonds rated Aa1/stable outlook) new project guidelines, however, the city is expected to issue only its share of project costs, instead of the full cost including the commonwealth's share as was the historical practice. The city plans to issue up to $8 million in additional general fund debt to finance its energy service contract program before the end of 2010. Additionally, the city plans to continue water and sewer system upgrades, which will primarily be financed in the near term through self-supporting debt issues of up to $54 million, some of which is expected to be issued through the state revolving fund. Moody's believes Lowell will be able to maintain a favorable debt position despite the anticipated need for significant city investment for future capital and development efforts. Lowell has no exposure to variable or auction rate debt or derivative agreements.

WHAT COULD MOVE THE RATING-UP:

"Replenishment of reserves and sustained structural balance

WHAT COULD MOVE THE RATING-DOWN:

"Additional declines in reserves

"Significant deterioration of tax base and demographic profile

"Increase in debt burden

KEY STATISTICS

2008 population (estimated, US Census): 103,615 (-1.5% since 2000)

1999 Per Capita Income: $17,557 (67.7% of commonwealth, 81.3% of nation)

1999 Median Family Income: $45,901 (74.4% of commonwealth, 91.7% of nation)

Unemployment, August 2010: 10.7% (MA 8.3%, US 9.5%)

2011 Equalized Value: $6.9 billion

2009 Equalized Value Per Capita: $66,860

Average Annual Growth, Equalized Value (2005-2011): 2.9%

Adjusted Debt Burden: 1.8%

2009 General Fund Balance: $8.6 million (2.9% of General Fund Revenues)

2009 Undesignated General Fund Balance: $620,000 (0.2% of General Fund Revenues)

2009 Available Reserves: $1.1 million (0.4% of General Fund Revenues)

Unused Property Tax Levy Capacity (FY 2010): $4.96 million

Long-term General Obligation Debt Outstanding: $166 million

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Susan Kendall
Analyst
Public Finance Group
Moody's Investors Service

Conor McEachern
Backup Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S ASSIGNS A1 UNDERLYING AND Aa2 ENHANCED RATINGS TO CITY OF LOWELL'S (MA) $8 MILLION GO STATE QUALIFIED RZED BONDS; OUTLOOK IS STABLE
No Related Data.
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