February 2, 2013

Low debt, good management, diverse tax base key to Augusta's strong bond rating

Standard & Poor's rating of AA retained, even as city struggles with tough economy and declining revenues

By Keith Edwards kedwards@centralmaine.com
Staff Writer

AUGUSTA -- Despite economic struggles and declining revenue, the city has retained its AA bond rating, putting it among the highest-rated municipalities in the state and the top 3 percent to 5 percent of the most credit-worthy communities in the country, an expert and city officials say.

Bill Stokes

Staff file photo by Andy Molloy

click image to enlarge

William Bridgeo

Contributed photo

Bond ratings are used by potential lenders to determine entities' credit-worthiness. They also are a major factor in determining interest rates charged on bonds.

For residents, a strong bond rating means their municipality is likely to get a lower interest rate, which reduces the cost of borrowing funds for projects.

Augusta retaining its AA bond rating in the face of a stagnant economy and reduced state revenue to the city means more than just lower interest rates, according to Mayor William Stokes.

"It also tells you this city is well-run," Stokes said. "They recognize we're a pretty efficient operation. We're not wasting money here. We have manageable debt."

To be rated AA amid a difficult economy and at a time when the state's bond rating has been downgraded "shows that our efforts to control spending and the property tax rate while maintaining essential municipal services are paying off," Stokes said.

The state's bond rating was downgraded recently by one of the major bond rating agencies, to the same AA level the city maintained, though with a different rating agency. The state's bond rating by Fitch Ratings was recently downgraded to AA from AA+.

The city was rated at AA by a different agency, Standard & Poor's. The highest possible credit rating with Standard & Poor's is AAA.

The rating of AA is its third-highest possible rating, and the agency says on its website that an AA rating means the entity so rated has a "very strong capacity to meet financial commitments."

Richard Ranaghan, senior vice president of public finance at Gorham Savings Bank, who assists many Maine municipalities in selling their bonds, including the city of Augusta, said Augusta's AA rating "puts them in the top 3 to 5 percent of all communities in the country, as far as credit quality."

"There are a couple of municipalities in Maine rated higher, but Augusta is right up there," said Ranaghan, who has about 37 years of experience in public and private finance management. "It really comes down to the two M's -- money and management. Your management -- elected and appointed -- are they having their books audited in a timely manner? Is there a good budget process? And on the money side, how strong is your balance sheet?"

Standard & Poor's credit analysts, in their summary report on the city's bond rating, said the rating reflects its view of the city's:

* role as the state capital and regional economic center;

* diverse property tax base and strong per-capita market value;

* strong financial position with consistently balanced operations and growing reserves in the past three audited fiscal years; and

* low and manageable debt burden, after factoring in state support for certain school debt.

The report noted city management expects economic development in the city, including construction of natural gas pipeline in the region and the new $312 million MaineGeneral Medical Center hospital, will boost the property tax base in the coming years.

The city needed a bond rating to sell $2.6 million in bonds, approved by councilors, to pay for items including street and sidewalk improvements, a new firetruck, and energy efficiency and other improvements to city facilities.

The city's interest rate on those bonds is 1.74 percent, which City Manager William Bridgeo said is the lowest interest rate he's seen in his 37 years in city management.

(Continued on page 2)

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