Canton, Massachusetts · Saved source text
AAA Bond Rating February 2018
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Summary: Canton Town, Massachusetts; General Obligation Primary Credit Analyst: Anthony Polanco, Boston 617-530-8234; anthony.polanco@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 FEBRUARY 15, 2018 1
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Summary: Canton Town, Massachusetts; General Obligation Credit Profile US$4.83 mil GO mun purp loan bnds (Tax-exempt) ser 2018 dtd 03/15/2018 due 05/15/2030 Long Term Rating AAA/Stable New Canton GO Long Term Rating AAA/Stable Affirmed Rationale S&P Global Ratings assigned its 'AAA' rating and stable outlook to Canton, Mass.' series 2018 general obligation (GO) bonds and affirmed its 'AAA' rating, with a stable outlook, on Canton's existing GO debt. Under our criteria, titled "Ratings Above The Sovereign: Corporate And Government Ratings—Methodology And Assumptions," published Nov. 19, 2013, on RatingsDirect, we rate Canton higher than the sovereign because we believe the town can maintain better credit characteristics than the nation in a stress scenario based on its predominantly locally derived revenue base and our view that pledged revenue supporting bond debt service is at limited risk of negative sovereign intervention. In 2017, local property taxes generated 74% of revenue, which demonstrated a lack of dependence on central government revenue. The town's full-faith-and-credit pledge, subject to Proposition 2 1/2 limits, secures the bonds. We rate the limited-tax GO debt on par with our view of Canton's general creditworthiness, reflected in the rating on the unlimited-tax GO bonds. We understand officials intend to use series 2018 bond proceeds to fund various capital improvement projects and refund Canton's series 2010 GO bonds. The rating reflects our opinion of Canton's: • Very strong economy, with access to a broad and diverse metropolitan statistical area (MSA); • 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 2017; • Very strong budgetary flexibility, with an available fund balance in fiscal 2017 of 18% of operating expenditures; • Very strong liquidity, with total government available cash at 28.2% of total-governmental-fund expenditures and 6x governmental debt service, and access to external liquidity we consider strong; • Very strong debt-and-contingent-liability position, with debt service carrying charges at 4.7% of expenditures and net direct debt that is 15.8% of total-governmental-fund revenue, as well as low overall net debt at less than 3% of market value and rapid amortization, with 79.4% of debt scheduled to be retired within 10 years, but a large pension and other-postemployment-benefit (OPEB) obligation; and • Strong institutional framework score. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 15, 2018 2
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Summary: Canton Town, Massachusetts; General Obligation Very strong economy We consider Canton's economy very strong. The town, with an estimated population of 22,551, is in Norfolk County in the Boston-Cambridge-Newton MSA, which we consider broad and diverse. The town has a projected per capita effective buying income of 155% of the national level and per capita market value of $210,592. Overall, market value has grown by 5.6% over the past year to $4.7 billion in fiscal 2018. The county unemployment rate was 3.2% in 2016. Canton is a suburban, primarily residential community 15 miles south of Boston. The town's location along Route 128 and Interstate 95 and two commuter-rail train stations provide local residents with easy access to numerous employment centers, including downtown Boston; the Route 128 high-tech corridor; and Providence, R.I. Assessed value continues to grow due to a healthy real estate market and ongoing development. Developments include Grimes Crossing, a residential development, and a new food-equipment manufacturing facility from Reiser Corp. Royall Development is also completing a new hotel and restaurant worth about $19.2 million with an expected completion date in fall 2018. The town also entered into a development agreement with Canton Holdings LLC to redevelop the former Plymouth Rubber site and create 272 residential units and 252 garden-style units. Top Golf is also looking to build a new recreational complex in the town within the next few years. Canton has also been actively improving and expanding infrastructure to support new developments and the expansion of its commercial and industrial sectors. Therefore, we expect Canton's economy to remain very strong. Leading employers include Dunkin Brands Inc., Meditech, Computershare, and Destination XL Group. Reebok, once the leading employer and second leading taxpayer, moved its headquarters to Boston from Canton in fall 2017. While Reebok is currently looking to sell its Canton facility, it has remained current with its property tax payments. Reebok has been receiving a 49% property tax break over the past 18 years, which ends in fiscal 2018. Due to this tax break, Canton assesses Reebok at about $46.5 million, or about 2% of the town's total tax levy. Officials believe the property is worth much more however, and they expect to name a new owner within the next two months to three months. Reebok will continue to pay taxes until it sells the building. 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. In developing the budget, the town uses conservative assumptions grounded in historical trend analysis and careful state-aid and local-tax-revenue tracking. Management regularly monitors budgetary performance and presents monthly reports to department heads and the town administrator. Management also performs a five-year budget forecast and communicates the results to department heads. Canton maintains a five-year capital improvement program that identifies funding sources, as well as a reserve target to keep unassigned fund balance above 15% of budgeted expenditures, which the town has adhered to since fiscal 2017. The town follows the commonwealth's investment policy and monitors and reports investments monthly. The town does not have a formal debt policy. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 15, 2018 3
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Summary: Canton Town, Massachusetts; General Obligation Strong budgetary performance Canton's budgetary performance is strong, in our opinion. The town had operating surpluses of 2.4% of expenditures in the general fund and 5% of expenditures across all governmental funds in fiscal 2017. General fund operating results have been stable over the past three fiscal years with a result of 3.6% of expenditures in fiscal 2016 and 1.7% in fiscal 2015. Fiscal 2017 results include adjustments for recurring transfers and one-time capital expenditures paid for with bond proceeds. Management attributes the fiscal 2017 positive performance primarily to conservative budgeting, which led to higher-than-expected revenue. In particular, the town saw increases in building-permit fees and motor-vehicle excise taxes. It also had turnbacks in departmental expenditures that netted cost savings across the budget, totaling more than $500,000. The fiscal 2018 budget totals $91 million and includes a $450,000 fund balance appropriation. While officials report budget-to-actual results are tracking the budget favorably, they indicate they could use approximately $500,000 in reserves for capital projects. Although we expect budgetary performance to remain strong even with the planned use of reserves, our assessment of budgetary performance could change if the town were to realize higher-than-expected drawdowns. In addition, while we expect Canton to continue to manage the budget accordingly, we believe it could face some budgetary challenges as fixed costs associated with long-term liabilities increase. Property taxes account for 74% of general fund revenue, followed by intergovernmental revenue at 17%. Collections remain, in our view, strong, averaging 99% over the past three years. Very strong budgetary flexibility Canton's budgetary flexibility is very strong, in our view, with an available fund balance in fiscal 2017 of 18% of operating expenditures, or $17 million. The town has consistently maintained, what we consider, very strong reserves over the past three fiscal years. Although management indicates it could use about $500,000 of reserves in fiscal 2018 for capital purposes, we expect budgetary flexibility to remain very strong. In addition, the town has a reserve target of maintaining unassigned fund balance at 15% of expenditures; officials do not currently expect to draw down below these levels. Very strong liquidity In our opinion, Canton's liquidity is very strong, with total government available cash at 28.2% of total-governmental-fund expenditures and 6x governmental debt service in fiscal 2017. In our view, the town has strong access to external liquidity if necessary. Canton is a frequent issuer of GO debt. Canton confirmed it does not have any contingent-liquidity risk from financial instruments with payment provisions that change upon the occurrence of certain events. We expect liquidity to remain very strong. Very strong debt-and-contingent-liability profile In our view, Canton's debt-and-contingent-liability profile is very strong. Total-governmental-fund debt service is 4.7% of total-governmental-fund expenditures, and net direct debt is 15.8% of total-governmental-fund revenue. Overall net WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 15, 2018 4
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Summary: Canton Town, Massachusetts; General Obligation debt is low at 0.8% of market value and approximately 79.4% of direct debt is scheduled to be repaid within 10 years, which are, in our view, positive credit factors. With this issuance, Canton will have about $52 million in total direct debt outstanding. The town currently expects to issue an additional $12.1 million of debt over the next five years to finance various capital improvement projects. In our opinion, Canton's large pension and OPEB obligation is a credit weakness. Canton's combined required pension and actual OPEB contribution totaled 8% of total-governmental-fund expenditures in fiscal 2017. Of that amount, 4.3% represented required contributions to pension obligations and 3.7% represented OPEB payments. The town made its full annual required pension contribution in fiscal 2017. The funded ratio of the largest pension plan is 61.6%. Canton contributes to a cost-sharing, multiemployer, defined-benefit plan administered by Norfolk County Retirement System. Using updated reporting standards in accordance with Governmental Accounting Standards Board Statement Nos. 67 and 68, the town's proportionate share of the net pension liability was about $39.9 million with a 61.6% funded ratio at Dec. 31, 2016, based on an assumed rate of return of 8%. We believe this low funded ratio is due to numerous years of underfunding, aggressive assumptions, and weak market performance. Due to this low funded ratio, we believe contributions will likely continue to rise over the next few fiscal years. While costs remain manageable, we believe the town has a limited ability to control future pension-liability growth. Canton also provides OPEB to retirees. It has set up an OPEB trust to prefund the liability, which we view as positive. At July 1, 2016, the most recent actuarial valuation, Canton reported an $86.4 million OPEB liability. The OPEB trust has a $2.9 million balance as of fiscal 2017. The town has added an additional $1 million to the OPEB trust in fiscal 2018; it plans to budget an additional $800,000 for fiscal 2019. Although we recognize that management is attempting to mitigate the risks associated with the large pension and OPEB obligation and that costs are currently manageable, we believe unfunded liabilities will likely remain a challenge since costs continue to grow and pressure the long-term budget. Strong institutional framework The institutional framework score for Massachusetts municipalities is strong. Outlook The stable outlook reflects S&P Global Ratings' opinion of Canton's very strong economy and budgetary flexibility, supported by strong management. We believe the town's very strong debt-and-liquidity profile further support the rating. We expect the town's property tax base to remain a stable revenue source, which should allow management to maintain strong budgetary performance. Therefore, we do not expect to change the rating within the two-year outlook period. While unlikely to occur, we could lower the rating if finances were to deteriorate significantly or experience budgetary pressure due to low pension funding, leading to a draw down on reserves. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 15, 2018 5
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Summary: Canton Town, Massachusetts; General Obligation 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 • Local Government Pension And Other Postemployment Benefits Analysis: A Closer Look, Nov. 8, 2017 • 2017 Update Of Institutional Framework For U.S. Local Governments Ratings Detail (As Of February 15, 2018) Canton Twn st qual go rfdg bnds Long Term Rating AAA/Stable Affirmed Canton Twn GO mun purp loan bnds ser 2017 dtd 03/16/2017 due 06/15/2037 Long Term Rating AAA/Stable Affirmed Canton GO Unenhanced Rating AAA(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. 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.capitaliq.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 FEBRUARY 15, 2018 6
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