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SP Credit Report Oct 12 2016Summary: Nantucket, Massachusetts; General Obligation; Note Primary Credit Analyst: Christina Marin, Boston 617-530-8312; christina.marin@spglobal.com Secondary Contact: Steven E Waldeck, Boston (1) 617-530-8128; steven.waldeck@spglobal.com Table Of Contents Rationale Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2016 1 1734847 | 302290118 Summary: Nantucket, Massachusetts; General Obligation; Note Credit Profile US$40.928 mil GO mun purp ln bnds ser 2016 due 10/15/2036 Long Term Rating AA+/Stable New US$9.21 mil GO BANs ser 2016 dtd 11/10/2016 due 11/10/2017 Short Term Rating SP-1+ New Rationale S&P Global Ratings has assigned its 'AA+' long-term rating and stable outlook to the Town of Nantucket, Mass.' series 2016 bonds. At the same time, S&P Global Ratings assigned its 'SP-1+' rating to Nantucket's 2016 bond anticipation notes (BANs), maturing Nov. 10, 2017. The short-term rating reflects our criteria for evaluating and rating BANs. In our view, Nantucket maintains a very strong capacity to pay principal and interest when the BANs come due. The town has the legal authorization to take out the BANs with long-term GO bonds, and it has a record of accessing capital markets. Nantucket's full-faith-and-credit pledge, subject to the limits of Proposition 2 1/2, secures the bonds and BANs. We understand the bonds have been excluded from the secondary levy limit as a result of a town vote; however, the bonds are still subject to the levy ceiling. We recognize the town maintains significant flexibility despite these limitations; therefore, we do not make a rating distinction for the limited-tax GO. According to town officials, bond proceeds will be used for capital improvements to the sewer system, the high school, and the fire station, among other uses. Proceeds from the BANs will be used toward sewer upgrades, airport improvements, and design documents for a town-run nursing home. The rating reflects our assessment of Nantucket's: ·Strong economy, with projected per capita effective buying income at 148% of the national level and market value per capita of $1.9 million; ·Strong management, with "good" financial policies and practices under our financial management assessment (FMA) methodology; ·Strong budgetary performance, with operating surpluses in the general fund and at the total governmental fund level in fiscal 2016; ·Very strong budgetary flexibility, with an available fund balance in fiscal 2016 of 22% of operating expenditures; ·Very strong liquidity, with total government available cash at 70.2% of total governmental fund expenditures and 8.8x governmental debt service, and access to external liquidity we consider strong; ·Adequate debt and contingent liability position, with debt service carrying charges at 8.0% of expenditures and net direct debt that is 78.2% of total governmental fund revenue, as well as low overall net debt at less than 3% of WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2016 2 1734847 | 302290118 market value, but significant medium-term debt plans; and ·Strong institutional framework score. Strong economy We consider Nantucket's economy strong. The town, with an estimated population of 10,583, is located in Nantucket County. The town has a projected per capita effective buying income of 148% of the national level and per capita market value of $1.9 million. Overall, the town's market value grew by 13.0% over the past year to $20.5 billion in 2016 due to a revaluation. The county unemployment rate was 5.5% in 2015. Nantucket is located on Nantucket Island, approximately 30 miles south of Cape Cod. Known for its expansive beaches and historical character, the town's economy is centered on high-end tourism, with a population that swells to 45,000 in the summer months. The largest employers are the town of Nantucket (670 employees); the Nantucket Cottage Hospital (180); and Nantucket Island Resorts (125). The island is serviced by at least 20 ferries daily, as well as six-14 commercial flights. Nantucket is 13 miles long and three to six miles wide, and 40% is protected as open space. In recent years, the town has undergone a demographic shift as the service industry has expanded. As a result, the schools have increased beyond capacity, and there's been a demonstrated need for more affordable housing. Nantucket has actively worked to meet the needs of changing demographics through the construction of a new elementary school and permitting of additional affordable housing. Notable developments include the ongoing construction of the Nantucket Cottage Hospital, a $90 million project funded entirely through donations ($20 million coming from Massachusetts General Hospital); and Harbor Place Redevelopment, a plan to redevelop an underused section of downtown into commercial, residential, and retail space, complemented by a three-story parking garage and transportation center. Also, Richmond Great Point Development LLC is looking to develop 42 residential buildings on 14.5 acres, a development that could increase Nantucket's affordable housing stock to 7% from 2%, responding to the shift in demographics. Given the per capita wealth indicators and ongoing investment and development on the island, we expect our assessment of the economy to remain at least strong. Strong management We view the town's management as strong, with "good" financial policies and practices under our FMA methodology, indicating financial practices exist in most areas, but that governance officials might not formalize or monitor all of them on a regular basis. Town management is conservative in its budgeting approach, and relies on seven years of historical data as a baseline for budgetary assumptions. New growth is estimated at 85% of long-term averages; state aid is assumed to remain constant; and operating expenditures are projected to increase at 2% on average. Conservative budgeting has led to a track record of operating surpluses. Budget monitoring is sound: Town officials review the budget weekly to identify problem areas and submit quarterly budget-to-actual reports to the Board of Selectmen. Management is able to make midyear revenue and expenditure adjustments to meet fiscal targets. Nantucket has a seven-year, annually updated long-term financial plan, which identifies future issues, enabling town officials to make decisions with a long-term perspective. Nantucket also has a 10-year capital plan that is annually updated and identifies funding sources. Town WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2016 3 1734847 | 302290118 Summary: Nantucket, Massachusetts; General Obligation; Note officials are in the process of codifying existing management policies, which they expect will occur before the end of the calendar year. Their debt management policy limits debt service to 12% of expenditures, except for debt that has been excluded from the levy limit through a town vote. The debt policy also targets a 10-year amortization at 65%: The current 10-year amortization is 56%. The town's reserve policy was designed to meet cash flow purposes, recognizing that Nantucket is susceptible to catastrophic events. Although the policy sets a baseline fund balance level of 15% of expenditures, reserves are much higher, allowing for a buffer for damage sustained through flooding. The town's investment policy prioritizes reduced risk over yield; and requires quarterly reporting to selectmen. Strong budgetary performance Nantucket's budgetary performance is strong in our opinion. The town had operating surpluses of 4.9% of expenditures in the general fund and of 10.6% across all governmental funds in fiscal 2016. In our calculation of budgetary performance, we net out capital expenditures that we consider one-time expenses. Primary drivers of the positive operating results in 2016 include higher-than-anticipated economically sensitive revenues (room occupancy, meals, and motor vehicle excise taxes); and expenditure turn backs of $2.5 million. Nantucket's primary source of revenue is property taxes, which represents 78% of revenues; state aid accounts for 8.5%. Nantucket operates various enterprise accounts, including a municipal airport and a 45-bed nursing home that provides long-term nursing and short-term rehabilitative care. Neither of these enterprises is self-supporting on a generally accepted accounting principles basis, according to a three-year historical average calculation. The nursing home requires an annual transfer of $3.2 million from the general fund, and will likely require additional support as the nursing home assumes debt during reconstruction. The 2017 budget totals $75.89 million, and is a 6.2% increase over the previous year. Significant changes include the health division relocation to town administration; increased building activity, which has affected all departments; and the loss of two full-time equivalent administrative staff. We expect general fund and total government fund performance to remain consistent over our two-year outlook horizon, given the town's strong management and demonstrated historical results. Very strong budgetary flexibility Nantucket's budgetary flexibility is very strong, in our view, with an available fund balance in fiscal 2016 of 27% of operating expenditures, or $20.6 million. Over the past three years, the total available fund balance has remained at a consistent level overall, totaling 27% of expenditures in 2015 and 28% in 2014. As previously mentioned, the town's reserve policy is to maintain a minimum of 15% of expenditures in the fund balance. Reserves have been sustained higher (close to 30% the past three years) to serve as a buffer in the event of a catastrophic event. In addition to Nantucket's 15% baseline policy, town officials are targeting a general stabilization fund of 7.0% of expenditures (currently at 6.6%), and a capital stabilization fund of 3.0% of expenditures (which is fully funded). Providing additional flexibility is the town's $2.79 million in unused levy capacity. However, we did not make an adjustment for unused levy capacity given Nantucket's already very strong reserve levels. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2016 4 1734847 | 302290118 Summary: Nantucket, Massachusetts; General Obligation; Note We note that reserves declined slightly in 2016 due to several one-time capital projects relating to road improvements and upgrades to the athletic fields. Over the next two fiscal years, we expect the town's budgetary flexibility will remain very strong as management does not have plans to significantly draw on reserves. Very strong liquidity In our opinion, Nantucket's liquidity is very strong, with total government available cash at 70.2% of total governmental fund expenditures and 8.8x governmental debt service in 2016. In our view, the town has strong access to external liquidity if necessary. The town has demonstrated strong market access by issuing GO bonds within the past several years. We note Nantucket does not have any contingent liquidity risk from financial instruments with payment provisions that change on the occurrence of certain events. We believe liquidity will remain very strong since there is no significant deterioration of cash balances planned or expected. Furthermore, management is not aggressive in its use of investments. We note the town is liable for 35% of any deficit, including operating and debt service costs associated with the Steamship Authority, which operates a boat service between Nantucket, Martha's Vineyard, and the mainland. We do not consider the authority a contingent liability as the last time any payment was required to subsidize operations was in 1962 and we believe the authority maintains sufficient reserves. We note that net operating income for the authority in fiscal 2015 was $11.7 million. Adequate debt and contingent liability profile In our view, Nantucket's debt and contingent liability profile is adequate. Total governmental fund debt service is 8.0% of total governmental fund expenditures, and net direct debt is 78.2% of total governmental fund revenue. Overall net debt is low at 0.5% of market value, which is in our view a positive credit factor. Negatively affecting our view of the town's debt profile is Nantucket's significant medium-term debt plans. Our analysis factors in $178 million in borrowing for sewer improvements and extensions; a new nursing home; and a new fire station. We recognize that a large portion of sewer improvement debt will be debt excluded. After this issue, the town will have $172.7 million in total direct debt outstanding, of which $9.2 million is BANs. The town guarantees debt absorbed by the Nantucket Islands Land Bank, which as of June 30, 2016, stands at $22.1 million. The Land Bank collects 2% of the purchase price of all real estate transfers on the island toward the acquisition of land for public purposes or open space. Pledged revenue was $19.26 million in 2015 and debt service was $2.8 million, achieving a coverage level of 3.5x. In the last 20 years, the Land Bank has raised over $97 million and preserved more than 2,200 acres of land. Nantucket's combined required pension and actual other postemployment benefits (OPEB) contributions totaled 8.8% of total governmental fund expenditures in 2016. Of that amount, 5.8% represented required contributions to pension obligations, and 3.0% represented OPEB payments. The town made its full annual required pension contribution in 2016. The town participates in the Barnstable Contributory Retirement System. In 2016, the town had a net pension liability of $59.9 million, and the plan was 58% funded. Town officials expect the pension plan to be fully funded by 2036, at WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2016 5 1734847 | 302290118 Summary: Nantucket, Massachusetts; General Obligation; Note which point Nantucket will focus on paying down the liability associated with OPEB. As of June 2016, the unfunded liability associated with OPEB was $88.6 million. In 2013, the town began an OPEB trust, which has a current balance of $1.75 million. Town officials are planning to budget $500,000 annually to the trust. Strong institutional framework The institutional framework score for Massachusetts is strong. Outlook The stable outlook reflects our view of Nantucket's extraordinarily high market values and strong income levels, which we believe mitigates risks associated with storms and flooding. We believe the town's strong management conditions, which has resulted in favorable reserve levels and consistent operating performance also serves as a stabilizing factor. For these reasons we do not expect to change the rating in the next two years. Upside scenario We could raise the rating if Nantucket demonstrates an ability to maintain strong budgetary performance and sustain growth in available reserves as the town assumes an increase in debt for large capital projects over the near term. We could also raise the rating if income levels improve to levels comparable to higher-rated credits. Downside scenario While unlikely during our outlook period, if Nantucket's operating performance were to become unbalanced, and cause a significant decline in available reserves, we could lower the rating. Related Research ·S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013 ·Incorporating GASB 67 And 68: Evaluating Pension/OPEB Obligations Under Standard & Poor's U.S. Local Government GO Criteria, Sept. 2, 2015 ·2015 Update Of Institutional Framework For U.S. Local Governments Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2016 6 1734847 | 302290118 Summary: Nantucket, Massachusetts; General Obligation; Note STANDARD & POOR'S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor's Financial Services LLC. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. 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