Bond Rating Agency Issues Harwich Stable Financial Rating

By: William F. Galvin

Topics: Municipal Finance

Harwich has retained its AA-plus bond rating. PIXABAY PHOTO

HARWICH —Bond rating agency Standard and Poor's has issued a stable outlook in the town's annual credit rating, retaining Harwich's AA-plus long-term rating. The rating is an important factor in the interest rate the town gets when borrowing money.

“The stable outlook on the long-term rating reflects our opinion of Harwich's very strong economy, supported by strong management with good financial policies and practices. We do not expect to change the rating during the two-year outlook period due to our expectation that Harwich will likely maintain its strong budgetary performance and very strong budgetary flexibility,” the company's report reads.

“We could raise the rating if Harwich were to take meaningful steps to mitigate pension and OPEB (other post employment benefits) liabilities, coupled with an increase in, and sustainment of, available resources to levels we believe would enhance budgetary flexibility, as well as be comparable with higher-rated peers.”

Although unlikely, during this outlook period S&P could lower the rating if budgetary performance and flexibility were to experience significant pressure due to rising pension and OPEB costs, the review states.

In making the determination, the report cites a very strong economy; strong management with good financial policies and practices; strong budgetary performance with a slight operating surplus in the general fund and an operating surplus at the total-governmental-fund level in FY17; very strong budgetary flexibility, with available fund balance in FY17 of 15 percent of operating expenditures; very strong liquidity, with total available cash at 32 percent of total governmental fund expenditures; and access to external liquidity “we consider strong.”

The report goes on to note that the town has a very strong debt and contingent liability position, with debt service carrying charges at 5.2 percent of expenditures and net direct debt that is 75.3 percent of total governmental fund revenue. There is low overall net debt at less than 3 percent of market value and rapid amortization, with 66 percent of debt scheduled to be retired within 10 years, but significant medium-term debt plans. The town did get a strong institutional framework score.

“It means the projected outlook is positive,” Town Administrator Christopher Clark said of the report. “If everything keeps going it's looking good. But there is a minor possibility of a negative outlook.”

He said the town has had healthy free cash certifications over the past two years and those funds have been used to build reserves. But they would likely have concerns if the accounts were drawn down. He also noted that S&P was concerned about the OPEB debt. Clark said only eight states in the nation do not participate in the federal Social Security Program. Massachusetts is one of them. S&P looks at these states a little differently. The other state don't have this liability, which otherwise falls to the federal government under Social Security, he said.

Clark said the town has to have a funding plan for OPEB, but he stressed the town has made progress over the past couple of years. But S&P is concerned that if there is an increase in retirements and pension, OPEB could have a negative budgetary impact.

Clark said he had been hoping for a AAA rating, which would provide the lowest interest rates for borrowing. He pointed out when he started 4.5 years ago, the town had 4 to 5 percent in reserves and the rating company wanted to see 8 to 12 percent.

“Now we're in the range of 18 percent,” Clark said, “but they've moved the numbers quite a bit,” seeking 18 to 25 percent in reserve. He called the increase in his tenure from 4.5 percent to 18 percent “phenomenal.” S&P wants to see the town in the 20 percent range for two to three years, Clark added the town has done well in building reserves in FY19.

“To have S&P review our finances and have such a strong statement about how positive they are is very encouraging,” Clark said.

He also pointed out S&P has cited the Cape communities as land rich and income average and that hurts the towns. The agency considers the towns retirement communities with people on fixed incomes. Those demographics are going to be hard to overcome when seeking the AAA rating, Clark added.