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HomeMy WebLinkAboutAppendix D - Moodys Credit Rating OpinionU.S. PUBLIC FINANCE CREDIT OPINION 30 April 2020 Contacts Nicholas Lehman +1.617.535.7694 VP-Senior Analyst nicholas.lehman@moodys.com Thomas Jacobs +1.212.553.0131 Senior Vice President/Manager thomas.jacobs@moodys.com CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 Nantucket (Town of) MA Update to credit analysis Summary Nantucket (Aaa stable) benefits from a large tax base with very strong home values and above average wealth and incomes. The economy is driven by seasonal tourism which increases the population more than four times to around 45,000. The financial position is stable with strong reserves and liquidity. The town's debt burden and long term pension and OPEB liabilities are expected to remain manageable. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. We do not see any material immediate credit risks for Nantucket. However, the situation surrounding Coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of Nantucket changes, we will update our opinion at that time. On April 30, 2020 we assigned MIG 1 ratings to the town's 2020 BANs and affirmed the town's Aaa issuer, GOULT and GOLT ratings with a stable outlook. Credit strengths »Sizable tax base with strong home values and equalized value per capita »Stable and healthy financial position with ample reserves and liquidity »Strong fiscal management Credit challenges »Large number of seasonal and second homes »Economy largely driven by tourism »Island community exposed to sea level rise and severe storms Rating outlook The stable outlook reflects our expectation that the town’s strong fiscal management will maintain a healthy financial position and moderate long term liabilities. The outlook also incorporates the strength of the large tax base and robust housing demand while the town continues to focus on the long term risks associated with its island location. Factors that could lead to an upgrade »Not applicable MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE Factors that could lead to a downgrade »Significant decline in reserves and cash (long term and short term ratings) »Multiyear trend of deterioration of the tax base (long term) »Decline in the demand for housing (long term) »Material increase in the debt burden or long term liabilities (long term) »Significant downgrade of the long term rating (short term) Key indicators Exhibit 1 Nantucket (Town of) MA 2015 2016 2017 2018 2019 Economy/Tax Base Total Full Value ($000)$17,816,255 $17,816,255 $21,682,664 $21,682,664 $23,796,648 Population 10,556 10,694 10,912 11,101 11,101 Full Value Per Capita $1,687,785 $1,666,005 $1,987,048 $1,953,217 $2,143,649 Median Family Income (% of US Median)165.1%161.9%155.1%158.9%158.9% Finances Operating Revenue ($000)$82,466 $88,987 $103,845 $108,089 $111,332 Fund Balance ($000)$25,807 $22,868 $38,378 $39,693 $39,549 Cash Balance ($000)$26,993 $25,081 $42,296 $43,604 $42,957 Fund Balance as a % of Revenues 31.3%25.7%37.0%36.7%35.5% Cash Balance as a % of Revenues 32.7%28.2%40.7%40.3%38.6% Debt/Pensions Net Direct Debt ($000)$159,692 $175,863 $206,737 $197,094 $237,328 3-Year Average of Moody's ANPL ($000)$114,374 $117,994 $123,046 $141,780 $153,289 Net Direct Debt / Full Value (%)0.9%1.0%1.0%0.9%1.0% Net Direct Debt / Operating Revenues (x)1.9x 2.0x 2.0x 1.8x 2.1x Moody's - adjusted Net Pension Liability (3-yr average) to Full Value (%)0.6%0.7%0.6%0.7%0.6% Moody's - adjusted Net Pension Liability (3-yr average) to Revenues (x)1.4x 1.3x 1.2x 1.3x 1.4x As of June 30 fiscal year end Source: Moody's Investors Service and Nantucket's audited financial statements Profile Nantucket is an island community located approximately 30 miles south of Cape Cod, Massachusetts. The town is primarily residential and had 10,912 residents as of the 2017 American community survey. The population swells to around 45,000 during the summer months. Detailed credit considerations Economy and tax base: sizable tax base supported by high-end housing stock Nantucket's tax base will likely continue to grow over the near term but on a more limited basis given the recent turn in the economy. Home values remain strong and new growth and building permits were on pace with prior years through fiscal 2020 but the economic uncertainty resulting from the coronavirus pandemic will have an impact. The town is Massachusetts' fourth largest tax base totaling $23.8 billion (2019-20 equalized value), is primarily residential (95% of 2020 assessed value) and has a year-round population of 11,101 which expands to around 45,000 during the summer months. Reflecting its status as a highly desirable seasonal resort community, 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 30 April 2020 Nantucket (Town of) MA: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE assessed value has grown for six consecutive years including 2.4% in 2020, bringing the five year compound growth rate to 6.3%. The assessed value trend has contributed to the 2017-18 equalized value increasing 21% since 2015 with the most recent increase of 9.7% for the 2019-20 equalized value resulting in a historic high above its pre-recession level of $22.2 billion. The median home value is above $1 million which is significantly above the state and national median and contributes to an equalized value per capita of $2.3 million, reflecting the high-end housing stock and limited year-round population. Income levels on the island are also above the national average, with median family income of 159% of the US median. Notably, year around residents make up 15% of the town's residential tax base with seasonal homes making up the remaining 85%. A high percentage of seasonal homeowners are extraordinarily wealthy. Financial operations, reserves and liquidity: strong financial position expected to be maintained through proactive management The town's financial position is very healthy and is expected to remain stable over the near term given conservative and proactive fiscal management. Key budget drivers continue to be salaries, employee benefits, and education. Given the recent economic declines that are expected from the coronavirus pandemic the town is already addressing an anticipated decline in revenue and the response in the budget planning for fiscal 2021 that starts in July. The fiscal 2019 audited financials reflect balanced general fund operations that ended the year with a slight decline in fund balance of $530 thousand due to planned transfer out of over $8 million for various capital needs. The available general fund balance changed slightly to $39.5 million representing a healthy 35.5% of general fund revenue. The town's primary revenue source is property taxes representing 72% of general fund revenue. The largest expenses are education representing 26% of general fund expenditures and pension and fringe benefits representing 22%. Town management projects that fiscal 2020 year end results will be relatively on budget but could end the year with a slight decline in available reserves because of an increase in accounts receivable because of a timing issue with the receipt of the years final property tax collections. In response to the coronavirus pandemic the state allowed municipalities to delay the due dates of the final quarterly property tax payments which Nantucket approved. The economic impact related to the pandemic is also expected to reduce local tax receipts from the following sources: room and meals taxes, building permits, and other excise taxes. In total, these revenue sources represent around 8% of general fund revenue. Nursing home operations remain stable with the current payer mix benefitting the town and helping to mitigate some additional overtime costs to insure the residents are not exposed to the coronavirus. According to the town, the nursing home has not experienced the spread of coronavirus that other facilities across the country have, in part due to a quick response by the town to close the nursing home to guests and other nonessential visits. Additionally, the town's airport enterprise will likely see material changes to its operating position next year. The fund is expected to end fiscal 2020 stable. The airport has been designated $6.2 million from the CARES Act. At least one major airline has canceled its seasonal flights and others are expected to at least delay when seasonal flights begin. The fiscal 2021 preliminary budget reflects a 3.2% increase compared to the prior year. The budget includes a 4.8% tax levy increase and a 50% cut in local tax receipts previously mentioned. The town also plans to address the negative financial impact by implementing a hiring freeze, possible delay in OPEB trust funding and redirecting funding of various reserves toward operating costs on a short-term basis. Town meeting has been delayed until at least May 30th and there is a possibility that a budget will not be finalized until after the start of the fiscal year on July 1. However, the state has adopted legislation for municipalities to start the 2021 fiscal year on a 1/12th operating budget based on the prior year during a state of emergency until a budget can be finalized. LIQUIDITY Cash and investments at the end of fiscal 2019 were almost $43 million representing a strong 38.6% of general fund revenue. We expect the cash position to remain relatively unchanged at the end of fiscal 2020. The liquidity position also provides over 2.5 times coverage on the town's current notes outstanding. Debt and long term liabilities: debt and long term liabilities remain manageable The town's direct debt burden of $219.6 million equals a manageable 0.9% of equalized value and almost 2 times general fund revenue. We expect the burden to remain relatively level over the next few years given the amortization schedule and plans for capital 3 30 April 2020 Nantucket (Town of) MA: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE financing. The debt burden includes $15.3 million in outstanding Nantucket Islands Land Bank (Aaa stable) bonds that the town supports with a pledge of its full faith and credit. The bonds are paid with a 2% tax on the purchase price of all real estate transfers. The tax provides strong coverage. DEBT STRUCTURE The entire debt portfolio is fixed rate with principal amortization of 60% of all debt outstanding over the next 10 years. The town's debt policy requires only the general fund supported debt to amortize 65% of principal in ten years. Fiscal 2019 debt service totaled $7.2 million representing 6.4% of general fund expenditures. DEBT-RELATED DERIVATIVES Nantucket is not party to any interest rate swaps or other derivative agreements. PENSIONS AND OPEB Nantucket's pension and OPEB liabilities are roughly equal to the debt burden and, though manageable at this time, represent a potential future credit challenge. The town participates in the Barnstable County Retirement System, a multi-employer defined benefit plan and makes annual required contributions based on at least its proportional share. Annual contributions are projected to increase by 8.5% annually for the next five years. The retirement plan expects to be fully funded by 2035 and currently uses a 7.35% discount rate. The town's teachers participate in the Massachusetts Teachers Retirement System in which the town receives on-behalf payments toward the liability that is covered by the Commonwealth. The town also funds its OPEB liability on a pay-go basis plus annual budgeted deposits into an OPEB trust. The table below summarizes the town's 2019 debt, pension and OPEB unfunded liabilities and contributions. Exhibit 2Nantucket's fiscal 2019 debt, pension and OPEB unfunded liabilities and contributions 2019 Amount ($ thousands)% of Operating Revenues Discount Rate Operating Revenue 111,332 Reported Net Pension Liability 78,855 70.83%7.38% Moody's Adjusted Net Pension Liability 156,795 140.84%4.22% Reported Net OPEB Liability 114,874 103.18%4.00% Moody's Adjusted Net OPEB Liability 124,313 111.66%3.50% Pension Contribution 6,271 5.63%- Pension Tread Water Gap [1]Not available N/A - OPEB Contribution 3,738 3.36%- Net Direct Debt 237,328 213.17%- Debt Service 7,177 6.45%- Total Fixed Costs 17,186 15.44%- [1] A positive pension tread water gap reflects a pension contribution smaller than the amount required to prevent the unfunded liability from increasing if all plan assumptions are realized. A negative tread water gap reflects a contribution larger than the amount required to keep the unfunded liability from increasing if all assumptions are realized. Source: Moody's Investors Service and Nantucket's audited financial statements The town's annual pension contributions over the prior three fiscal years 2016-18 (2019 not yet available) have averaged a moderate 88% of the tread water indicator which is the amount required to keep the unfunded liability from increasing if all actuarial assumptions are realized. Failure to realize the assumed return on pension assets could result in larger required increases to meet the funding schedule. Additionally, the town makes annual contributions toward its OPEB liability which has a plan fiduciary net position of 2.7% of the total OPEB liability. ESG considerations Nantucket has a high environmental risk over the long term given its exposure to sea level rise, extreme rainfall and storms. The town's reserve levels and satisfactory disaster mitigation planning adequately prepares the town to address a significant storm event. Additionally, the demand for housing in the town and economic incentives of private industry help to ensure strong rebuilding efforts. 4 30 April 2020 Nantucket (Town of) MA: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE While over the long term sea level rise could be a key credit risk, housing sales in recent years have been very strong, totaling over $1 billion annually. We will monitor this trend and any change in demand for property because of storm risk or sea level change will be reflected in the town's overall credit profile. The town is unique as an island community and its material social risks are incorporated in the economy and tax base factors. The town is a second home for very affluent individuals from all over the world creating a strong demand for real estate. Town management is very strong and continues to demonstrate conservative fiscal management including adhering to formalized financial, debt and capital policies. Massachusetts towns have an Institutional Framework score of “Aa,” which is strong. The sector’s major revenue source of property taxes, are subject to the Proposition 2 1/2 tax levy cap which can be overridden with voter approval only. However, the cap of 2.5% still allows for moderate revenue-raising ability. 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. Unpredictable revenue fluctuations tend to be minor, or under 5% annually. Across the sector, fixed and mandated costs are generally greater than 25% of expenditures. Fixed costs are driven mainly by debt service and pension costs. Unpredictable expenditure fluctuations tend to be minor, under 5% annually. 5 30 April 2020 Nantucket (Town of) MA: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE Rating methodology and scorecard factors The US Local Government General Obligation Debt methodology includes a scorecard, a tool providing a composite score of a local government’s credit profile based on the weighted factors we consider most important, universal and measurable, as well as possible notching factors dependent on individual credit strengths and weaknesses. Its purpose is not to determine the final rating, but rather to provide a standard platform from which to analyze and compare local government credits. Exhibit 3 Nantucket (Town of) MA Scorecard Factors Measure Score Economy/Tax Base (30%) [1] Tax Base Size: Full Value (in 000s)$23,796,648 Aaa Full Value Per Capita $2,143,649 Aaa Median Family Income (% of US Median)158.9%Aaa Notching Factors:[2] Other Analyst Adjustment to Economy/Taxbase Factor: environmental risk related to sea level rise Down Finances (30%) Fund Balance as a % of Revenues 35.5%Aaa 5-Year Dollar Change in Fund Balance as % of Revenues 13.2%Aa Cash Balance as a % of Revenues 38.6%Aaa 5-Year Dollar Change in Cash Balance as % of Revenues 15.5%Aa Management (20%) Institutional Framework Aa Aa Operating History: 5-Year Average of Operating Revenues / Operating Expenditures (x)1.0x A Notching Factors:[2] Unusually Strong or Weak Budgetary Management and Planning: stong budgetary management Up Debt and Pensions (20%) Net Direct Debt / Full Value (%)0.9%Aa Net Direct Debt / Operating Revenues (x)2.0x A 3-Year Average of Moody's Adjusted Net Pension Liability / Full Value (%)0.6%Aaa 3-Year Average of Moody's Adjusted Net Pension Liability / Operating Revenues (x)1.4x A Scorecard-Indicated Outcome Aa1 Assigned Rating Aaa [1] Economy measures are based on data from the most recent year available. [2] Notching Factors are specifically defined in the US Local Government General Obligation Debt methodology. [3] Standardized adjustments are outlined in the GO Methodology Scorecard Inputs publication. Source: Moody's Investors Service and US Census Bureau 6 30 April 2020 Nantucket (Town of) MA: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE © 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. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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REPORT NUMBER 1226397 7 30 April 2020 Nantucket (Town of) MA: Update to credit analysis MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 8 30 April 2020 Nantucket (Town of) MA: Update to credit analysis