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MOODY'S ASSIGNS MIG 1 RATING TO CITY OF LOWELL'S (MA) $3.68 MILLION BOND ANTICIPATION NOTES

21 Jun 2011

LONG-TERM A1 RATING AND STABLE OUTLOOK AFFIRMED, AFFECTING $165 MILLION OUTSTANDING GENERAL OBLIGATION DEBT; ENHANCED RATING OF Aa2 WITH STABLE OUTLOOK ALSO APPLIES

Municipality
MA

Moody's Rating

ISSUE

RATING

General Obligation Bond Anticipation Notes Tax-Exempt Series A

MIG 1

  Sale Amount

$2,980,000

  Expected Sale Date

07/04/11

  Rating Description

Bond Anticipation Notes

 

General Obligation Bond Anticipation Notes Taxable Series B

MIG 1

  Sale Amount

$700,000

  Expected Sale Date

06/22/11

  Rating Description

Bond Anticipation Notes

 

Opinion

NEW YORK, Jun 21, 2011 -- MOODY'S ASSIGNS MIG 1 RATING TO CITY OF LOWELL'S (MA) $3.68 MILLION BOND ANTICIPATION NOTES

LONG-TERM A1 RATING AND STABLE OUTLOOK AFFIRMED, AFFECTING $165 MILLION OUTSTANDING GENERAL OBLIGATION DEBT; ENHANCED RATING OF Aa2 WITH STABLE OUTLOOK ALSO APPLIES

Moody's Investors Service has assigned a MIG 1 rating to the City of Lowell's (MA) $2.98 million General Obligation Tax-Exempt Series A Bond Anticipation Notes (dated June 30, 2011 and payable September 24, 2011) and $700,000 General Obligation Taxable Series B Bond Anticipation Notes (dated June 30, 2011 and payable September 24, 2011). Concurrently, Moody's has affirmed the city's A1 long-term rating and stable outlook, affecting approximately $165 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.

Proceeds from the Series A tax-exempt notes will provide short-term financing for wastewater system improvements, land acquisition and school roof repair. Proceeds from the Series B Taxable notes will provide short-term financing for park improvements. The notes are secured by the city's general obligation limited tax pledge as debt service for the projects has not been excluded from Proposition 2 ½.

SUMMARY 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 the 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. The MIG 1 rating reflects Lowell's satisfactory long-term credit characteristics as well as an adequate history of access to capital markets.

STRENGTHS

-Sizeable tax base anchored by higher education and regional health care institutions

-Improving financial position guided by recently-adopted policies and more conservative budgeting and planning

-Moderate financial flexibility including unused property tax levy capacity

CHALLENGES

-Declining state aid

-Slim reserves available for unanticipated financial events

-Below-average socioeconomic profile

-Significant long-term pension and OPEB liabilities

DETAILED CREDIT DISCUSSION

SATISFACTORY HISTORY OF MARKET ACCESS

The city received six bids on its most recent bond anticipation note sale, dated June 10, 2010, three bids on its note sale dated August 21, 2009, two bids on its prior note sale dated June 30, 2009 and six bids on its sale dated May 18, 2009. Additionally, Lowell received three bids on its annual State Aid Anticipation Note (SAAN) sale, dated August 21, 2009, and four bids on its prior SAAN sales dated August 21, 2008 and August 21, 2007. All bids were received from major regional and national financial institutions. Moody's expects that the city will continue favorable access to the note markets, indicating its ability to refund the notes, if necessary, at their September, 2011 maturity.

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. Moody's believes that the program's proven history of timely payments, sound mechanics and Lowell's strong 6.2 times (projected for fiscal 2012) 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.

IMPROVING FINANCIAL POSITION DESPITE DECLINING STATE AID; RESERVES REMAIN NARROW

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 and enterprise funds. Revenue growth and flexibility remain limited, compounded by Lowell's dependence on state aid, which represented 59% of annual revenues in fiscal 2010. Operations in fiscal 2010 were challenged by a $10.5 million reduction in state aid. Expenditure reductions imposed after a mid-year, $3 million state aid cut were continued and additional department cuts, including layoffs, were utilized to balance the budget. The city maintained its modest $500,000 stabilization fund, which, until fiscal 2009, had been essentially depleted for over 25 years, modestly improving financial flexibility. Available reserves, including the unreserved general fund balance, the city's emergency reserve and stabilization fund, totaled a modest $5.8 million, 1.8% of general fund revenues.

Projections for fiscal 2011 indicate favorable, but modest, variances in revenues and a $2.8 million overexpenditure in the snow removal budget, which will be raised on the fiscal 2012 levy. The city transferred $1.2 million of free cash into the stabilization fund and available reserves are projected to total $6.7 million, a slight improvement at 2.2% of general fund revenues. Favorably, 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 budget for fiscal 2012 remains extremely lean and includes another general state aid reduction of $1.5 million, although Lowell's state aid for education increases by $7.2 million. The budget was balanced without the use of reserves and no further layoffs were required. Recently-adopted changes in the city's health insurance plan produced roughly $1 million in annual savings. The city's pension funding schedule was extended to 2034, relieving near-term pressure on the operating budget, but delaying progress on improving the system's 56.7% funding ratio. Notably, the city did not reduce its comfortable $4.9 million property tax levy capacity and has stabilized general fund operations by establishing self-supporting enterprise funds for the water system and parking operations.

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 2012 budget is balanced, funding future budgets without drawing on levy capacity is currently projected to result in moderate budget gaps for several years. 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.

SIZEABLE TAX BASE WITH REGIONAL HEALTH CARE AND EDUCATIONAL INSTITUTIONS

Although significant long-term potential for economic expansion and redevelopment exists in Lowell, the city's $6.9 billion tax base is expected to experience additional mild declines in assessed in the short term. Annual tax base values have declined since fiscal 2005 (reflecting values in January, 2004) yielding an average 0% growth since 2005. After two years of moderate gains assessed values declined 6%, 9.1% and 3.8% in fiscal 2009, 2010 and 2011, respectively. Fiscal 2012 assessed valuations are expected to experience another moderate decline, based on market conditions as of January 1, 2011, reflecting stable commercial and industrial values but ongoing softness in the residential sector.

Tax base declines in Lowell have been partially offset by new development, which has produced annual new growth in property tax revenue averaging $2.1 million since fiscal 2007, reflecting significant commercial redevelopment efforts in this mature urban center. New development activity dropped in fiscal 2011 to $1.6 million, well below the fiscal 2005 peak of $3.3 million. Consistent with regional trends, building permit activity in 2010 declined 26% from fiscal 2011 to $67 million, down from the peak of $164 million in 2007 and well under the previous five-year average of $103 million. Commercial vacancy rates remain elevated at 14% city-wide for Class A and B office space, but are favorable relative to regional rates. 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. The first phase of the Hamilton Canal District redevelopment project is well underway with 130 units of rental housing opening last April; site preparation and infrastructure construction to support an additional seven development sites is under construction and will be completed in 2011. The entire 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 2020. 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.

AFFORDABLE DEBT BURDEN WITH LIMITED FUTURE BORROWING PLANS

Lowell will continue to maintain a manageable debt burden (2.1% 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 30% of total debt is associated with the significant $200 million school facilities program undertaken over the last decade which the commonwealth reimburses at a rate of 90%. The adjusted debt position falls to 1.6% of equalized valuation after accounting for school construction reimbursement. While debt service claimed an above average 6.7% of General Fund expenditures in fiscal 2010, outstanding obligations are amortized at a reasonable rate of 62.6% 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 $56 million in authorized but unissued debt, approximately $27 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 $15 million in additional general fund debt to finance equipment purchases and to complete its energy service contract program in the next year. Additionally, the city plans to continue wastewater system upgrades, which will primarily be financed in the near term through self-supporting debt issues of up to $20 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

"Less conservative budgeting approach with reliance on fund balance appropriations

"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, April 2011: 9.7% (MA 7.4%, US 8.7%)

2011 Equalized Value: $6.9 billion

2011 Equalized Value Per Capita: $66,860

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

Adjusted Debt Burden: 1.6%

2010 General Fund Balance: $11 million (3.6% of General Fund Revenues)

2010 Undesignated General Fund Balance: $1.19 million (0.4% of General Fund Revenues)

2010 Available Reserves: $5.8 million (1.9% of General Fund Revenues)

Unused Property Tax Levy Capacity (FY 2011): $4.92 million

Long-term General Obligation Debt Outstanding: $165 million

The principal methodology used in this rating was Bond Anticipation Notes and Other Short-Term Capital Financings published in May 2007.

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 MIG 1 RATING TO CITY OF LOWELL'S (MA) $3.68 MILLION BOND ANTICIPATION NOTES
No Related Data.
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