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MOODY'S ASSIGNS Aa1 RATING TO PORTLAND'S (ME) $13.9 MILLION GO BONDS

15 Nov 2010

Aa1 RATING APPLIES TO $269 MILLION IN OUTSTANDING GO DEBT, INCLUDING CURRENT ISSUE

Municipality
ME

Moody's Rating

ISSUE

RATING

2010 Series C General Obligation Bonds

Aa1

  Sale Amount

$11,000,000

  Expected Sale Date

11/16/10

  Rating Description

General Obligation

 

2010 Series D General Obligation Refunding Bonds

Aa1

  Sale Amount

$2,900,000

  Expected Sale Date

11/16/10

  Rating Description

General Obligation

 

Opinion

NEW YORK, Nov 15, 2010 -- Moody's Investors Service has assigned a Aa1 rating to the City of Portland's (ME) $11 million 2010 Series C General Obligation Bonds and $2.9 million 2010 Series D General Obligation Refunding Bonds. Concurrently, the Aa1 rating assigned to Portland's $258 million in outstanding GO debt has been affirmed.

RATINGS RATIONALE

The Series C bonds are issued to finance the purchase and installation of energy saving fixtures in city buildings. The Series D bonds refund various maturities of Portland's Series 2000 bonds for an expected net present value savings of roughly 14.9% of refunded principal, without extension of maturity. The high-quality Aa1 rating heavily factors the city's role as one of Maine's (GO rated Aa2/stable outlook) and northern New England's primary economic centers. The Aa1 rating incorporates the city's stabilizing, but still narrow, financial position, as well as Moody's belief that the city's financial flexibility will remain constrained in the medium term due to limited growth potential in state aid and local receipts. The rating further incorporates management's proactive approach to managing financial challenges facing the city and its school system. The Aa1 rating also reflects the city's above average debt burden, which includes pension obligation bonds but is somewhat mitigated by the city's relatively limited long-term liabilities, as well as the city's exposure to significant swap liability and variable rate debt (45% of total debt outstanding).

SIZEABLE AND DIVERSE TAX BASE PROVIDES REGIONAL EMPLOYMENT STABILITY

The Aa1 rating reflects the importance of Portland's $8.2 billion tax base as Maine's largest city and economic center. Important sectors of the city's broad economy include health care, port activities, financial services, government services, and wholesale and retail trade. The city is home to the headquarters of UNUM Insurance (senior unsecured debt rated Ba1/stable outlook), Maine Medical Center (revenue bonds rated Aa3), the largest healthcare facility in northern New England and the city's largest employer, and port facilities which contain a major oil and gas terminal, as well as piers for passenger cruise and ferry service. Recessionary pressures have dampened Portland's redevelopment activity, as reflected in 2010 building permit activity which increased 38% over 2009 but was only 78% of the previous five-year average. The city continues to experience modest growth in assessed valuation in 2009 and 2010, which at 0.9% and 0.3%, respectively, significantly lagged the five-year average annual growth rate of 12.3%. As an important employment center, Portland attracts a large number of workers from surrounding communities, which greatly increases its workforce. Unemployment (5.8% in August, 2010) remains well below state (6.9%) and national (9.5%) levels. Moody's believes in light of the national recession and housing market downturn, prospects for growth in Maine's economy appear modest over the near term. Resident income levels are above those of the state and nation, and full value per capita is a strong $131,023.

FINANCIAL POSITION STRENGTHENS; SCHOOL DEFICIT ELIMINATED

After a period of instability which challenged the city's ability to sustain balanced operations and sufficient reserves, Portland's financial position has begun to stabilize. Operations in fiscal 2008 and 2009 were positive, resulting in an increase in the General Fund to $27.6 million, a satisfactory 12.1% of General Fund revenues, and a significant improvement from the fiscal 2007 General Fund balance of $21.3 million, representing 10% of revenues. Fiscal 2009 Undesignated General Fund balance stands at an improved $21.9 million, a relatively slim 9.6% of revenues, which represents a solid improvement over the $12.1 million balance, 5.7% of revenues, in fiscal 2007. Conservative expenditure management, including reduction of 100 positions citywide, as well as positive variances in state aid and other revenues offset property and excise tax deficits to produce budgetary surpluses of $2.5 million and $3.7 million, respectively, in fiscal 2008 and fiscal 2009. Notably, school operations continue to be tight but the department's new management team produced a positive school department fund balance of $1.5 million in fiscal 2009, a significant improvement from the $3.3 million deficit in fiscal 2007. Despite a $2 million reduction in state aid, management projects a reasonable $2.1 million surplus in fiscal 2010, due primarily to unspent school department appropriations. Total fund balance is projected to increase to $29.8 million, with $23.6 million in undesignated fund balance, a healthier 10.3% of revenues (pro forma). Notably, the school department has fully replenished the $3.3 million deficit incurred in fiscal 2007 and has generated a comfortable $1.3 million surplus, which is incorporated in the city's general fund balance. The city plans to reach full compliance with its adopted policy to maintain at least 12.5% of budget in unreserved general fund balance.

Operations in fiscal 2011 are tracking close to budget. Expenditures increased 1.99% over the fiscal 2010 budget, incorporating budget cuts in the majority of city departments, including the schools, as well as minimal salary increases for most city and school personnel. Portland maintains a comfortable $4.9 million cushion in unused property tax levy capacity under Maine's LD-1 property tax limit, which could partially mitigate future anticipated reductions in state aid. The city is committed to maintaining structural balance has not appropriated reserves to balance the budget in recent years. Favorably, the city recently adopted a strengthened fund balance policy which requires unreserved General Fund balance to be maintained at approximately 12.5% of the subsequent year's expenditures; the city is expected to fully comply by fiscal 2015, roughly five years after adoption.

While Moody's believes the steps the city has taken to bolster its financial position are favorable, we believe the city will be challenged to maintain structural balance while augmenting reserves in the medium term as the national recession continues to impact revenue and tax base growth. However Portland has maintained favorable financial flexibility despite slowing growth rates as allowed under the LD-1 property tax limitation, which limits levy growth to a factor of state income growth and new property assessments. The combined growth factor for fiscal 2011 totals 3.65%, which has declined gradually from a more ample 5.72% in fiscal 2007. Since adoption the LD-1 property tax limitation has not pressured the city's fiscal operations as new development activity in 2008 and 2009 resulted in healthy levels of levy growth. Further, the city will not experience pressure to fund increasing pension and OPEB liabilities; the city's unfunded pension liability was transferred to the state in 2001 after the issuance of pension obligation bonds and the city does not offer access to post-employment benefits to its retirees.

ABOVE-AVERAGE DEBT BURDEN REFLECTS THE ISSUANCE OF VARIABLE-RATE POBs

Moody's expects that Portland's above-average direct debt burden (3% of full valuation) will remain somewhat elevated in the near term but will moderate going forward given the city's commitment to limit new debt issues to $10 million annually for general city purposes. Additionally, we expect the city's sewer enterprise to maintain positive operations, including self support for debt related to the city's sewer system. The principal retirement rate is below average at 51.9% within 10 years, mostly due to the long-term amortization of the pension obligation bonds. Including overlapping debt for regional water, wastewater and solid waste utilities, the city's overall debt burden is also above average at 3.5%. In 2010 and the next four years the city expects to issue $61 million of debt through the state revolving fund for combined sewer overflow issues in order to comply with environmental regulations. This significant addition of indebtedness is expected to be serviced by increases in sewer revenues and as such is expected to be self-supporting, as are $49 million in outstanding sewer bonds which are not reflected in the debt burden.

A large portion of the city's debt (45%) represents variable rate Pension Obligation Bonds (POB) issued in 2001 to eliminate an unfunded pension liability. While the POBs have greatly increased the debt burden they have also eliminated investment performance risk by removing the long-term pension liability from the city and ceding it to the state. The POBs, coupled with the city's lack of an OPEB obligation, reflect limited off-balance sheet long-term employee benefit liabilities which compare favorably with other municipalities nationally. Liquidity on the variable rate issue is provided via a Standby Bond Purchase Agreement by Landesbank Hessen-Thueringen Girozentrale (long-term senior unsecured rating Aa2/stable outlook and short term P-1) which expires in 2014. Despite previous turmoil in the VRDO market Portland's bonds have continued to be successfully remarketed; however the city could face a significant increase in debt service should the POBs become bank bonds which would be subject to interest rates of up to 15%. Also factored in the city's debt burden is $9.2 million in contingent debt, a moderate portion of which were issued as variable-rate obligations, related to ecomaine (not rated), a regional solid waste authority. Portland and twenty other communities participate in a long-term agreement to deliver solid waste to ecomaine and have pledged their full faith and credit to support the assessments. Portland represents roughly 25% of the district's annual assessments and funds its obligations through a combination of user fees and general fund appropriations.

SIGNIFICANT SWAP EXPOSURE

The city entered into a floating-to-fixed swap to hedge against the variable POBs, the notional amount (currently $111.2 million) declines as principal is paid down on the debt and the term of the swap matches that of the debt. The counterparty agreement is expected to transfer to Bank of New York/Mellon (rated Aaa/stable outlook) from UBS AG (senior unsecured Aa3/negative outlook) in early December 2010 without any changes in terms or maturity. Under the terms of the swap, UBS pays monthly LIBOR plus 40 basis points and receives an escalating fixed rate (4.919% in September 2001 to 8.903% in June 2012 through the termination date in May of 2026). The fixed rate schedule was reportedly established to match the structure of the pension obligation. If either party's rating falls below A3, the swap could be terminated or collateral posting could be required at a level up to the termination payment. Swap and termination payments are on parity with the city's general obligation bonds. While recent market conditions have resulted in net swap obligations higher than budget the city had accumulated approximately $2.8 million from prior periods of positive swap performance in a reserve. The balance on the reserve has fluctuated with market conditions and now totals roughly $583,000. The November 4, 2010 estimated mark-to-market value on the swap was negative $56 million (roughly 203% of the city's general fund balance), reflecting in part the high interest rates in the out years. The city has the ability to bond for a termination payment; if they were required to do so under current market conditions, the city's direct debt burden would increase by approximately 20% to approximately 3.7% of full value. Favorably, only Portland has the option of early termination.

WHAT COULD MOVE THE RATING-UP:

"Improved financial position and enhanced reserve levels

"Reduced exposure to variable rate debt

"Significant tax base expansion and improved demographic profile

WHAT COULD MOVE THE RATING-DOWN:

"Decline in reserves and lack of compliance with financial policies

"Contraction of local economic activity

"Increase in debt levels

KEY STATISTICS:

2009 Population (estimate, US Census): 62,561 (-2.6% since 2000)

2010 Full Valuation: $8.19 billion

Full Value Per Capita: $131,023

2000 Per Capita Income: $22,698 (116.2% of State, 105.1% of US)

2000 Median Family Income: $48,763 (107.9% of State, 97.4% of US)

Unemployment (August 2010): 5.8% (ME 6.9%, US 9.5%)

Direct Debt Burden: 3.0%

Overall Debt Burden: 3.5%

Payout of Principal (10 years): 51.9%

FY09 General Fund Balance: $27.6 million (12.1% of General Fund Revenues)

FY09 Undesignated General Fund Balance: $21.9 million (9.6% of General Fund Revenues)

Post-Sale Long-Term G.O. Debt Outstanding: $269 million (includes $111 million Pension Obligation Bonds)

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


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa1 RATING TO PORTLAND'S (ME) $13.9 MILLION GO BONDS
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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