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Moodys Credit Opinion Oct 11 2016 (1)U.S. PUBLIC FINANCE CREDIT OPINION 11 October 2016 New Issue Contacts Nicholas Lehman 617-535-7694 AVP-Analyst nicholas.lehman@moodys.com Robert Azrin 617-535-7692 VP-Senior Analyst robert.azrin@moodys.com Nantucket (Town of) MA New Issue - Moody's Assigns Aa1 and MIG 1 to Nantucket, MA's GO Bonds & BANs Summary Rating Rationale Moody's Investors Service has assigned a Aa1 rating to the Town of Nantucket MA's $41 million General Obligation Municipal Purpose Loan of 2016 Bonds and a MIG 1 to $9.2 million General Obligation Bond Anticipation Notes (BANs, dated November 10, 2016 and payable November 10, 2017). Moody's maintains the Aa1 long-term rating on the town's outstanding general obligation bonds. The Aa1 rating reflects the town's stable financial position with healthy reserves, large tax base with very strong home values, above average wealth levels, and manageable debt burden and long-term liabilities. The MIG 1 rating reflects the strong long-term rating of the town, ample liquidity to cover outstanding notes, and sufficient management of refinancing risk. The rating also incorporates the town's ability to access the capital markets given the frequent issuance over the last five years. Credit Strengths »Sizeable tax base with strong home values »Stable and healthy financial position with ample reserves »Strong fiscal management Credit Challenges »Airport and nursing home enterprise operations »Moderate increase in debt issuance over near term »Exposure to potential storm risk Rating Outlook Outlooks are usually not assigned to local government credits with this amount of debt outstanding. Factors that Could Lead to an Upgrade »Large increase in wealth levels (median family income and per capita income) »Sustained trend of self-sufficiency in airport and nursing home enterprise funds MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 11 October 2016 Nantucket (Town of) MA: New Issue - Moody's Assigns Aa1 and MIG 1 to Nantucket, MA's GO Bonds & BANs »Additional increase in reserve levels Factors that Could Lead to a Downgrade »Significant reduction in reserves »Increased reliance on General Fund to support enterprise funds »Deterioration of tax base »Material increase in the debt burden beyond current expectations Key Indicators Exhibit 1 As of June 30 fiscal year-end Source: Moody's Investors Service Recent Developments Since our last rating report in July 2016, the fiscal 2016 draft CAFR is available and indicates a General Fund operating deficit of $3.1 million attributable to a material increase in capital spending. The town transferred $7.5 million into the Town Capital Projects fund to cover the capital expenditures, net of those transfers, the General Fund would have ended with a surplus given positive variance in both revenues and expenditures. Additionally, over the past year the town has formalized its comprehensive management practices including a reserve policy and long-term financial and capital planning. The policies will be adopted by the town board by the end of the calendar year. MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE 3 11 October 2016 Nantucket (Town of) MA: New Issue - Moody's Assigns Aa1 and MIG 1 to Nantucket, MA's GO Bonds & BANs Detailed Rating Considerations Economy and Tax Base: Sizeable Tax Base Supported By High-end Housing Stock Nantucket is an island community located approximately 30 miles south of Cape Cod, Massachusetts. The town's large $17.8 billion tax base is primarily residential (93% of 2016 assessed value) and has a year-round population of 10,298, although this number can swell to almost 45,000 during the summer months. Reflecting its status as a desirable seasonal resort community, assessed values remain high, although the town has experienced moderate declines in recent years. The town saw a 14.2% decline in assessed value in fiscal 2011 followed by minimal change until 2015 and 2016, which saw 7.3% and 13% increases, respectively. Home values on the island are significantly above the state and national average with an equalized value per capita of $1.7 million, reflecting the high-end housing stock and limited year-round population. Wealth levels on the island are also above the national average, with a median family income of $89,728, or 147.4% of the US average. New growth in the town spiked to $1 million in 2015 and 2016, reflecting renewed investment through new and redevelopment projects in the area after the recession, and is projected at $900,000 to $1 million in fiscal 2017. Additionally, the town's unemployment rate remains below the commonwealth and US. Financial Operations, Reserves and Coverage: Strong Financial Position Expected To Continue Nantucket's financial position will likely remain stable over the near term due to conservative fiscal management. Additionally, after four years of strong growth, we expect the healthy reserves to be maintained at the current levels as a percent of revenues. The fiscal 2015 audited financials reflect an operating surplus of $783,000 attributable to strong building permit fees and local receipts as well as savings in most expenditure line items. The surplus increased the available General Fund balance (committed, assigned and unassigned) to $25.8 million or 31.3% of revenues. The town's revenues are derived primarily from property taxes (81% of 2015 revenues) with a strong collection rate of over 98% in the current fiscal year. Education (30% of 2014 expenditures) and pension and fringe benefits (20%) continue to be the town's largest expenditures. The town also transfers out approximately 11% of expenditures annually to cover enterprise fund operations for solid waste, nursing home and airport. The solid waste fund receives $5.5 million annually due to a transfer out of a portion of the tax levy (excluded from Proposition 2 1/2) dedicated to solid waste operations given the seasonal fluctuation in town population. In fiscal 2015 the nursing home fund (Our Island Home) received $2.3 million to subsidize operations. The subsidy represents only 4% of 2015 expenditures and has remained stable for at least the last five years. The airport enterprise operations in 2015 mark the first year of no subsidy from the General Fund (see prior reports for details). Fiscal 2016 draft CAFR indicates a operating deficit of $3.1 million driven by a $7.5 million in transfers out of the General Fund to the Town Capital Projects fund. Net of the transfers towards capital expenditures, the General Fund experienced positive variance in both revenues and expenditures. The available General Fund balance declined to $22.9 million or 25.6% of revenues while the unassigned fund balance increased to $17.6 million or 19.7%. The fiscal 2017 budget increased by 6.3% from 2016, due largely to health insurance and additional staffing. The budget is balanced with a tax levy expected to be equal to the 2.5% levy limit and no free cash appropriation. General Fund subsidies to the Our Island Home Fund and Solid Waste Fund increased due to one-time costs, to $2.8 million and $5.6 million, respectively. LIQUIDITY The net cash position at the end of fiscal 2015 was $27 million or a healthy 32.7% of revenues. The draft fiscal 2016 financials report a slight declined by still strong cash position of $25.1 million or 28.1% of revenues. The strong liquidity position at the end of fiscal 2016 provides ample coverage of 3.8 times the current BAN issuance. Debt, Pensions and Legal Covenants: Debt Burden Expected To Increase But Remain Manageable The current direct debt burden (1% of equalized value) will rise over the near term given additional capital plans. The debt burden will remain manageable given sufficient structuring and taxpayer support of projects. Capital projects, including approximately $80 million in sewer projects and a $37.5 million nursing home facility will contribute to a material increase over the next few years. Additionally, the town pledges its full faith and credit on the Nantucket Islands Land Bank (Aa1) bonds with $22.1 million outstanding. The bonds are considered self-supporting and are secured by a 2% tax on the purchase price of all real estate transfers occurring each year. The town is expected to continue to be a frequent issuer with an authorized unissued debt amount of $158 million. MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE 4 11 October 2016 Nantucket (Town of) MA: New Issue - Moody's Assigns Aa1 and MIG 1 to Nantucket, MA's GO Bonds & BANs DEBT STRUCTURE The entire debt portfolio is fixed rate with 68% of principal retired in ten years. Fiscal 2015 debt service represented 8.5% of expenditures. DEBT-RELATED DERIVATIVES Nantucket is not party to any derivatives. PENSIONS AND OPEB The town participates in the Barnstable County Contributory Retirement System, a multi-employer, defined benefit retirement plan. The town's annual contribution for the plan was $4.7 million in fiscal 2015, or 5.4% of General Fund expenditures. The town's 2015 three-year average adjusted net pension liability, under Moody's methodology for adjusting reported pension data, is $114.4 million, or a moderate 1.4 times General Fund revenues. Moody's uses the adjusted net pension liability to improve comparability of reported pension liabilities. The adjustments are not intended to replace the town's reported liability information, but to improve comparability with other rated entities. We determined the town's share of liability for the plan in proportion to its contributions to the plan. The town has established an OPEB trust and in addition to making pay-as-you-go contributions of $2.3 million in 2015, the town also budgets for a $500,000 annual contribution into the trust. The current balance in the OPEB trust is $1.3 million, and an additional $500,000 was deposited in fiscal 2016 and budgeted for in 2017. Total fixed costs in fiscal 2015, including debt service, required pension contributions and retiree healthcare payments, represented $14 million, or 15.1% of expenditures. Management and Governance Town management has shown a long term trend of consistent and conservative fiscal management. In fiscal 2016 the town formalized its management policies including debt, financial and reserve policies and long-range financial and capital planning. The financial planning includes a seven year operating forecast with adequate budget assumptions. All together, the formal adoption of these management policies position the town to maintain their strong credit profile over the long term. Massachusetts towns have an institutional framework score of “Aa,” or strong. Revenues are highly predictable due to a heavy reliance on property taxes. Towns have a moderate revenue-raising ability given the Proposition 2 ½ levy limit. Expenditures primarily consist of personnel costs, as well as education costs for towns that manage school operations, and are highly predictable given state-mandated school spending guidelines and employee contracts. Towns have a moderate expenditure reduction ability given the high presence of collective bargaining contracts, offset by low fixed costs in most cases. Legal Security The bonds in the amount of $36.96 million are secured by the town's general obligation unlimited tax pledge as debt service has been excluded from the levy limits of proposition 2 ½. The remaining bonds are secured by the town's general obligation limited tax pledge as debt service has not been voted exempt from Proposition 2 ½. The BANs are secured by the town's general obligation limited tax pledge as debt service has not been excluded from Proposition 2 ½. Use of Proceeds Bond proceeds will redeem $27.6 million of BANs scheduled to mature and the remaining balance will finance multiple capital projects of the town including the high school and fire station projects. The BAN proceeds will renew a like amount of notes scheduled to mature that financed multiple capital projects. Obligor Profile Nantucket is an island community located approximately 30 miles south of Cape Cod, Massachusetts. The town is primarily residential and has a year-round population of 10,298, although this number can swell to almost 45,000 during the summer months. MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE 5 11 October 2016 Nantucket (Town of) MA: New Issue - Moody's Assigns Aa1 and MIG 1 to Nantucket, MA's GO Bonds & BANs Methodology The principal methodology used in this general obligation rating was US Local Government General Obligation Debt published in January 2014. The principal methodology used in this bond anticipation note rating was US Bond Anticipation Notes published in April 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE 6 11 October 2016 Nantucket (Town of) MA: New Issue - Moody's Assigns Aa1 and MIG 1 to Nantucket, MA's GO Bonds & BANs Ratings Exhibit 2 Nantucket (Town of) MA Issue Rating General Obligation Municipal Purpose Loan of 2016 Bonds Aa1 Rating Type Underlying LT Sale Amount $40,928,000 Expected Sale Date 10/19/2016 Rating Description General Obligation General Obligation Bond Anticipation Notes, Series 2016 MIG 1 Rating Type Underlying ST Sale Amount $9,210,443 Expected Sale Date 10/19/2016 Rating Description Note: Bond Anticipation Source: Moody's Investors Service MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE 7 11 October 2016 Nantucket (Town of) MA: New Issue - Moody's Assigns Aa1 and MIG 1 to Nantucket, MA's GO Bonds & BANs © 2016 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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