Fitch Rates Hingham, MA's GO Refunding Bonds 'AAA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AAA' rating to the following Hingham, Massachusetts (the town) general obligation (GO) bonds:

--$22,925,000 GO refunding bonds, series 2016.

The proceeds of the bonds will be used to refund all or a portion of the town's outstanding series 2007 and 2009A bonds. The bonds are expected to sell via competitive sale on May 10.

In addition, Fitch affirms the following ratings:

--Issuer Default Rating (IDR) at 'AAA';

--$77.6 million outstanding GO bonds series 2007, 2009A and 2015 and GO refunding bonds series 2009B and 2010 at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of Hingham backed by its full faith and credit. Property taxes levied by the town are subject to limitation by the Proposition 2 1/2 statute, unless voters approve the exclusion of debt service on the bonds from the limitation. A portion of the town's series 2016 bonds and outstanding bonds are exempt from the limitations of Proposition 2 1/2.

KEY RATING DRIVERS

The 'AAA' IDR and GO rating reflect Fitch's expectation for the town of Hingham to maintain healthy financial flexibility throughout economic cycles, consistent with a history of strong operating performance and sound reserves. The town's strong financial profile reflects a wealthy property tax base, modest expenditure growth and a demonstrated ability to reduce expenditures during economic downturns. Fitch expects long-term liabilities to remain moderate based on manageable capital needs and a practice of fully funding its annual required contributions (ARC) for its pension and other post-employment benefits (OPEB).

Economic Resource Base

Hingham is a wealthy residential suburb of Boston located in Plymouth County about 15 miles south of Boston on the Atlantic coast. The estimated 2014 population of 22,964 is up 3.6% since the 2010 census.

Revenue Framework: 'aaa' factor assessment

Fitch expects Hingham to realize continued healthy revenue growth based on anticipated increases in its tax base from new growth and management's historical practice of levying close to or the full allowable 2.5% annual increase in its tax levy. The city's independent legal ability to raise revenues is somewhat constrained by the state's Proposition 2.5% law but total general fund revenue growth of about 4.9% annually over the past 10 years has exceeded both U.S. GDP and CPI for the same period.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected by Fitch to be in line with revenue growth over time. Carrying costs for long-term liabilities claim a moderate proportion of governmental spending. The town has demonstrated the flexibility and willingness to cut spending during economic downturns.

Long-Term Liability Burden: 'aaa' factor assessment

Fitch anticipates Hingham's long-term liability burden to remain low based on a manageable capital plan and history of full funding of its pension ARC and, more recently, full funding of its OPEB ARC. Hingham's debt and unfunded net pension liabilities are a low 6.4% of personal income.

Operating Performance: 'aaa' factor assessment

The reliability and stability of a primarily property tax generated revenue stream combined with careful expenditure management has led to a robust level of reserves over the past five years. Fitch expects management to maintain a strong level of financial resilience.

RATING SENSITIVITIES

Financial Performance: The IDR and GO rating are sensitive to changes in financial performance over time and the impacts on financial flexibility.

CREDIT PROFILE

Revenue Framework

Real and personal property taxes are the largest revenue source and make up roughly 80% of the fiscal 2016 budgeted revenues. Motor vehicle and boat registration excise taxes make up another approximately 4% of revenues adding to this stable revenue source.

The town's taxable assessed valuation declined modestly through the recession, stabilizing in fiscal 2014 at $5.5 billion. Following a tax base reassessment in fiscal 2015 the tax base increased by a solid 6.8% and then further in fiscal 2016 by 4.3% as property values increased.

Historical revenue growth has been positive on a real and nominal basis as a result of increases in the tax base from new development as well as management's practice of typically increasing its property tax levy by the full 2.5% permitted under state law. Fitch expects this level of growth to continue due to management's levy practice and future tax base growth.

Pursuant to state law, Proposition 2 1/2 limits the town's ability to levy property taxes by a "levy ceiling", an absolute cap on the level of property taxation, set at 2.5% of the overall property tax valuation, and a levy limit which restricts the annual growth in taxation by a 2.5% increase over the previous year's levy plus the value of new growth. Taxation in excess of the levy limit requires voter approval. Declines in equalized value lower the "levy ceiling" and vice versa. The town levy ceiling (currently $154 million) is very high compared to its current tax levy ($77 million) due to continued growth in value over the years.

Additionally, voted debt can be excluded from Proposition 2 1/2 limits. The town has outstanding bonds in which a portion of the debt is exempt from the limit and for fiscal year 2016 the amount of exempted debt service was $4.78 million.

Management has historically levied close to the full 2.5% levy increase each year. Any excess in levy capacity is carried forward and available for use at any time. The town's excess capacity at fiscal year-end 2016 was minimal at $510,992.

Expenditure Framework

General fund expenditure growth has historically been in line with revenue growth and the town has flexibility to reduce expenditures if necessary. Growth is expected by Fitch to continue at this same pace.

Pension contributions should increase going forward due to slightly low funded levels but currently comprise only 6% of governmental expenses. Annual pension cost increases over the past five years, though, have been modest. Carrying costs for debt, pensions and OPEB were a manageable 13.5% of fiscal 2015 governmental spending.

Long-Term Liability Burden

Debt levels are low when compared to the tax base at 1.4% and levels are not expected to materially change. Principal amortization over 10 years is above-average at 58%.

The town's employees (excluding teachers) participate in the Hingham Contributory Retirement System. The estimated funding level using Fitch's 7% investment rate of return (IRR) is a somewhat low 66%. However, consistent ARC funding and the affordable unfunded liability as of Jan. 1, 2014 of an estimated $50 million using Fitch's 7% IRR is only 0.8% of taxable values somewhat mitigating this concern.

Fitch views positively the town's efforts to manage its future OPEB liability through the establishment of a trust, with a fiscal year end 2015 balance of $7.3 million. The unfunded liability was $50.4 million at fiscal year-end 2014, or a modest 0.8% of taxable value.

The state provides annual support for the required pension contributions for the town's teachers. This revenue and expense is a pass-through recorded in the general fund.

The town is currently evaluating the purchase of a privately owned water system that services the town and several neighboring jurisdictions. Any purchase by the town would likely be funded with GO bonds resulting in a notable increase in total outstanding debt. Fitch would expect the bonds to be repaid through water user fees, although it would ultimately be a contingent general fund liability. If the water system is determined by Fitch to be self-supporting, including the payment of this debt, Fitch would net the debt from the town's tax supported debt calculation.

Operating Performance

The town has experienced steady growth in revenues supporting surplus operations over the past five fiscal years and the buildup of reserves. Fitch's scenario analysis does benefit from the impact on operating results of inclusion of non-recurring sources received in fiscal 2015 ($2.4 million in bond premiums and $1.2 million in reimbursements from bond proceeds). Even without these other sources, the town's financial resilience is considered strong by Fitch.

Due largely to the non-recurring sources mentioned above, fiscal 2015 ended with an operating surplus (after transfers) of $5.7 million increasing unrestricted fund balance to $30.1 million from $24.5 million, or a strong 31% of spending. Motor vehicle and meals tax revenues came in better than expected and departmental costs were lower in all areas, also contributing to the positive results. The town implemented a revised general fund balance policy in 2013 and currently meets the required unassigned balance level of 16%-20% of expenditures. The town's current level of reserves is far higher than what Fitch believes is necessary for the rating to remain stable given the town's revenue raising ability and spending flexibility.

The fiscal 2016 general fund budget totals $99 million, an increase of 3.3% over the prior year with no significant categorical increases. Management projects a modest surplus at fiscal year-end. Management uses conservative budget practices and has reduced departmental expenses during periods of economic stress. Fitch would expect these actions to continue in the future.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160503006899/en/

Fitch Ratings
Primary Analyst:
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Jeremy Stull, +1-646-582-4981
Analyst
or
Committee Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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