A first for announcing stellar financial news from three bond ratings: Having to justify it
The city’s financial health has won top marks from all three major bond raters for the 18th straight year, officials announced Monday – an honor limited to only about three dozen communities nationwide.
For what may be the first time, a citizen put the city briefly on the defensive about the apparent good news of three great bond ratings.
“You gotta wonder why only 35 cities nationwide earn this distinction. It’s simpler than you’d think. The reason is that almost nobody bothers to apply for more than one,” said resident Gary Mello, who has run for City Council on a platform of lower municipal spending. “Why? Why waste time and money on something you don’t need?”
Mello called the process behind getting ratings from Fitch Ratings, Moody’s Investors Services and Standard & Poor’s an expensive and time-consuming effort “to put on a dog and pony show to earn merit badges we really don’t need,” especially if the information is redundant.
The practice was defended by City Manager Louis A. DePasquale, who until his September appointment was assistant city manager for fiscal affairs, overseeing the bond ratings process personally. (“Congratulations on the Aaa bond rating,” councillor Leland Cheung told DePasquale on Monday. “It would be pretty embarrassing if we promoted the finance guy and we lost that.”)
It costs the city only $90,000 to get bond ratings from all three major agencies, DePasquale said.
They bring value, too, he said. The ratings come with comprehensive examinations of city finances that can reveal coming weaknesses in city finance, and so long as the agencies agree Cambridge is worthy of top ratings, allow the city to borrow money to pay for huge improvement projects at low interest rates. The city is handling a debt load of $320 million yet has a five-year bond payout of only 1.8 percent, based on buyers’ confidence they’ll be paid back on schedule, DePasquale said.
Things to watch
Parking fund problems and responding to drought conditions in the past year lowered cash reserves in the short term, he said, but those are likely a blip in city finances. Meanwhile, the city has put money aside to handle the debt load.
“I take very seriously the concerns about what we need to look at,” DePasquale said, including how long term that debt load looks – especially with two upcoming school campuses to be rebuilt – and the demands of retiree costs not already covered by city pensions, estimated in 2009 when the city began its funding at a total $599 million by 2026. (Councillor Nadeem Mazen said the obligation “freaks me the heck out.”) In addition, at least one rating agency wondered what would happen if Cambridge’s tax base weakened. “These are all things we’re aware of, and it’s good to see we’re on the same page. Our concerns are their concerns.”
DePasquale reminded councillors that when was he hired by a former city manager in 1982 to be budget director, the city’s bond rating had been suspended, a sign of fiscal distress.
Cambridge’s fiscal status is now so secure that it not only can spend a half-billion dollars on new school facilities, but last year at a Finance Committee meeting spent up to an hour “figuring out how to spend $1 million more on public art,” vice mayor Marc McGovern pointed out.
Despite low payouts on Cambridge’s municipal bonds, there was no shortage of residents eager to take part in the Feb. 17-23 sale of “minibonds” by the city – their first chance to buy what has previously been sold only to large institutional investors. The $2 million in five-year minibonds sold out to 240 residents spending an average $8,500 out of a total $20,000 cap, said Jeana Franconi, director of the city’s Budget Department. Two informational meetings about the sale were “incredibly well attended. In fact one of our meetings was standing room only.”
That’s despite a payout of only 1.6 percent interest, meaning an investor putting in the average amount would come out only $680 richer at the end of five years.
“No one is holding their breath for this return,” said Mazen, referring to it as basically “a gift to the city” that would be best as part of an investment portfolio that went into the tens of thousands or even millions of dollars.
The process was intended to weed out smaller investors whom it would hurt more than help, Franconi said, and DePasquale said those that remained “were excited to say they were going to contribute to Cambridge’s financial plan. There were a lot who just wanted to be part of it.”