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SHREWSBURY, Massachusetts – Moody’s Investors Service has assigned a Aa2 rating to the Town of Shrewsbury’s (MA) $6.1 million General Obligation Land Acquisition Bonds, Series A, and $681,000 General Obligation Water Bonds, Series B. Concurrently, Moody’s has also affirmed the Aa2 rating assigned to the town’s $68.2 million in outstanding general obligation bonds. Of the town’s total outstanding debt, approximately $65 million, including the Series 2012 A bonds, is secured by the town’s unlimited general obligation tax pledge, as debt service has been voted exempt from the levy limitations of Proposition 2 1⁄2; the remaining $10 million, including the Series 2012 B bonds is not excluded from Proposition 2 1⁄2, and is secured by the town’s general obligation limited tax pledge. The bonds, will be used to retire a like amount of outstanding Bond Anticipation Notes (BANs), which were originally issued for land acquisition and various water system upgrades.
SUMMARY RATING RATIONALE
The Aa2 rating reflects the town’s satisfactory financial position, which is expected to remain so despite annual appropriations of reserves. In addition, the rating incorporates the town’s sizeable and affluent tax base, and modest debt profile with average principal amortization.
STRENGTHS — Sizeable, affluent tax base — Adequate reserve levels — Manageable debt profile
CHALLENGES — Significant long-term liabilities for pension and OPEB — Town annually appropriates free cash to supplement budget
DETAILED CREDIT DISCUSSION FINANCIAL POSITION EXPECTED TO REMAIN STABLE, DESPITE ANNUAL RESERVE APPROPRIATIONS
The Town of Shrewsbury is expected to maintain a satisfactory financial position despite annual reserve draws. Over the last several years, the town has annually appropriated reserves as a means to supplement the annual operating budget. For fiscal 2011, Shrewsbury appropriated $1.4 million in free cash, $500,000 of which was used to reduce the town’s property tax levy. Positively, the town was able to replenish its free cash through positive operations, driven by a favorable budget to actual variance on local receipts, as well as several departmental turn backs of unspent appropriations. The town’s financial statements are presented with GASB 54 standards and show a fiscal 2011 unassigned general fund balance of $8.1 million, an adequate 8.3% of revenues, which includes the town’s $157,136 stabilization fund. Total General Fund balance represented $15.5 million, or a healthy 15.9% of revenues. The town received 51.7% of its fiscal 2011 revenues from property tax, and enjoyed strong collection rates of 99.7%.
The fiscal 2012 budget included a $3.4 million free cash appropriation, $500,000 of which was used to reduce the levy. Similar to the prior fiscal year, the town saw a positive budgetary variance on both local receipts and departmental appropriations. Despite the positive budgetary operations, the town is anticipating a reduction in reserves of approximately $1.1 million, representing the amount of unreplenished free cash appropriations.
The fiscal 2013 budget included another free cash appropriation of $3.1 million, $500,000 of which was used to reduce the levy. The budget included no major changes in assumptions, and management reports no major variances thus far.
The town maintains its own retirement plan for all employees, with the exception of teachers and certain school administrators. The plan is administered by the Shrewsbury Retirement Board (SRB), and as of January 1, 2010, it was 70.8% funded. The town is required by the state to fully fund its Annually Required Contribution (ARC), which was $3.1 million in 2011, representing a modest 3.2% of General Fund expenditures. Currently, the plan assumes a fairly aggressive 8.25% rate of return, with the SRB reporting that the plan will be fully funded by 2022. Moody’s notes that should the assumed rate of return be adjusted downward, the town’s ARC could be increased significantly, or the plan’s anticipated funding schedule could be extended. The town currently contributes to its OPEB liability on a pay-as-you-go basis. The town contributed 24.3% of its Annual OPEB cost in fiscal 2011, representing $1.5 million. The total Unfunded Actuarially Accrued Liability (UAAL) for OPEB is $90 million, as of July 1, 2010
MODEST NEW GROWTH EXPECTED FOR SIZEABLE RESIDENTIAL TAX BASE
Shrewsbury is primarily residential community, favorably located in Worcester County on state Route 9 and near the Interstate 495 corridor. Shrewsbury experienced a period of high growth in the 1990’s, with population growth exceeding 31% from 1990 to 2000. Continuing on that solid growth, Shrewsbury saw another 12.5% increase in population from 2000 to 2010, contrary to regional population decline trends in the Northeast. Although the town’s equalized valuation roughly doubled to over $5 billion since 2001, tax base growth in this primarily residential community is expected to be limited to redevelopment in the long term as the supply of developable land consists of smaller parcels that lack transportation access or infrastructure. Moderate contraction in assessed and equalized valuations has eroded some of the strong growth in the previous decade. Equalized valuation expansion has slowed to 0.1% annually, on average, since 2008. Regional and national real estate market declines contributed to an overall 7.6% decline in assessed valuation from 2007 to 2011, which primarily affected the residential sector of the tax base. Favorably, the town’s values have begun to stabilize, with fiscal 2012 assessed values showing a 1.7% increase over 2011. Wealth levels in Shrewsbury continue to trend above national medians with per capita income and median family income representing 146.2% and 155.2% of the nation, respectively.
MAJORITY OF DEBT SUPPORTED BY VOTERS
We anticipate that Shrewsbury’s average 1.5% overall debt burden will remain manageable, given satisfactory amortization of principal (79.1% within 10 years), self-supporting water and sewer system debt and significant state school building aid, as well as a favorable history of voter support for capital projects. Approximately 87% of state school building aid, as well as a favorable history of voter support for capital projects. Approximately 87% of the town’s outstanding debt is excluded from Proposition 2 1⁄2. Related debt service is supported by property tax revenue which is added to Shrewsbury’s limited property tax levy for operations, significantly reducing strain on the annual budget. After adjusting for commonwealth reimbursement, the town’s debt burden drops to a manageable 0.9% of equalized valuation. Future borrowing plans are limited, but include a potential $9.5 million issuance in Fiscal 2014 to fund a portion of a town library project. The town plans to seek voter approval for a debt exclusion on that issuance. Shrewsbury has no exposure to variable or auction rate debt or swap agreements.
WHAT COULD MAKE THE RATING GO UP
Continued operating surpluses resulting in significant growth in reserves — Steady progress toward reducing unfunded liabilities for pension and OPEB — Significant tax base expansion and improvement of demographic profile
WHAT COULD MAKE THE RATING GO DOWN
Decline in available reserves — Significant increase in debt burden without exclusions from Proposition 2 1⁄2 — Erosion of tax base through valuation declines — Lack of progress in funding long-term liabilities KEY STATISTICS 2010 Population: 35,608 (+12.5% since 2000) 1999 Per Capita Income: $31,570 (121.6% of MA, 146.2% of US) 1999 Median Family Income: $77,675 (126.0% of MA, 155.2% of US) Unemployment (June 2012): 5.6% (MA 6.3%, US 8.4%) 2011-12 Equalized Value: $5.06 billion 2011-12 Equalized Value per capita: $142,413 Preliminary 2013 Equalized Value: $5.07 billion Average Annual Equalized Value Growth (2008-2013): 0.1% FY 2011 General Fund Balance: $15.5 million (15.9% of General Fund revenues) FY2011 Unassigned General Fund Balance: $8.1 million (8.3% of General Fund revenues) Overall debt burden (unadjusted, includes overlapping debt): 1.5% Amortization of principal (10 years): 79.1% Long-term general obligation debt outstanding: $75 million.