SWAMPSCOTT — The town’s bond rating has been upgraded to AA+, which officials said will help reduce the cost of borrowing, and is a reflection of efforts to improve Swampscott’s long-term financial stability.
Ronald Mendes, town treasurer and assistant town administrator, said the town’s bond rating before the upgrade from Standard & Poor’s Financial Services was “Aa2” on Moody’s bond rating scale, which is equivalent to a rating of “AA” on the Standard & Poor’s rating scale and is one step lower than its current “AA+” rating.
AA+ is the second highest rating possible and was obtained in connection with the upcoming issuance of $5.875 million in general obligation bonds to fund several capital projects, including the new turf field at Blocksidge Field, sewer main work, the purchase of a new fire engine, and a recent LED street lighting upgrade, Mendes said.
“This upgrade is a real recognition of the fiscal discipline that the town has tightened up over the past couple of years,” Mendes said. “Swampscott now maintains budget stabilization reserves in excess of 15 percent of revenue and has a plan to address the pension and other post-employment (OPEB) liabilities that have been, and continue to be, an area of concern.”
Selectman Peter Spellios said it’s been many years since the town has seen an increase in its bond rating, which is a reflection of improved fundamentals in town, but it’s also an indicator of one of its biggest challenges for a AAA rating, which is unfunded pension liabilities.
Town Administrator Sean Fitzgerald said the town outlined in its presentation to Standard & Poor’s a focus on Swampscott’s strong local economy, including an above-average median income and low unemployment rate in relation to the state and county, an increased tax base of $624,291 over the past four years, which shows new growth, and its proximity to Boston.
He said the new rating will help the town save a few basis points (in terms of interest), which should help the town’s efforts to achieve its goal of a AAA rating.
“I really felt strongly that we gave them a sense that Swampscott was on the move and we’re really making some good decisions that are helping to improve our long-term financial stability,” Fitzgerald said. “In terms of that upgraded bond rating, it will help us with our new bond offering.”
The AA+ rating assigned to the town’s issue of 2018 general obligation bonds was determined to have a stable outlook, according to a press release from Standard and Poor’s.
“The stable outlook reflects our opinion of Swampscott’s very strong economy, supported by consistently strong budgetary performance and flexibility,” reads Standard & Poor’s release. “We do not anticipate changing the rating within the two-year outlook period.”
According to Standard & Poor’s, the town’s credit weakness is its large pension and OPEB obligation. Swampscott’s combined required pension and actual OPEB contributions totaled 10.6 percent of total government expenditures in 2018. Of that, 7.2 percent represented required contributions to pension obligations and 3.4 percent represented OPEB payments.
Mendes said the town has a plan to fully fund its pension plan, administered by the Swampscott Contributory Retirement Board, and therefore pay off its net pension liability by 2032, which has gone from $47.2 million two years ago to about $44.9 million.
The funded ratio of the pension plan is currently at 49.1 percent. Despite the town increasing annual contributions, its annual pension carrying cost is projected to remain between 7.7 and 8.5 percent of the operating budget. Standard & Poor’s advised that if the town’s operating budget fails to increase proportionately with the anticipated increase in pension required contributions, other areas of the budget could be pressured by the cost.
Standard & Poor’s said the town is examining how it can materially reduce its current OPEB unfunded liability, which totals approximately $115 million. Mendes said that is the present value of providing retirees with health and life insurance.
Mendes said the town’s OPEB trust, which is meant to pre-fund benefits, has about $1.5 million after a transfer from Town Meeting. According to Standard & Poor’s, the town plans to add $250,000 to the trust annually. Mendes said once the pension liability is paid off, the town will have the flexibility to shift those funds saved from reduced pension costs toward the OPEB unfunded liability.
Standard and Poor’s said it could raise the town’s rating if Swampscott formalized and adhered to stronger financial policies and practices, in accordance with their Financial Management Assessment (FMA), while reducing its pension and OPEB liabilities, and maintaining stronger budgetary reserves. But it could lower the rating if retirement-related costs begin to pressure the budget, leading to reduced budgetary performance or flexibility.
“It’s great to make some progress with these financial goals, but it does not preclude our responsibility to really deal with the day to day challenges,” Fitzgerald said. “We have budgets that we have to manage. We have revenue expectations that we have to really set if we’re going to continue to have a balanced focus on municipal finances.”
