Today, Lexington’s debt to EQV is 1.20%.
If Lexington passes the December 2017 debt exclusions, along with envisioned future capital projects (replace the high school, seventh elementary school, and police station), it’s debt load could climb beyond $540 million. At $540 million, the debt load is 5% of the present equalized valuation (EQV), at the very limit of what is legally allowed.
Does Lexington belong in the group of communities with 4%+ debt levels? Below is the full list.
Communities with 4% and 5% Debt Rates
| Community | Debt/EQV | Moody Bond Rating |
|---|---|---|
| Ashburnham | 4% | A1 |
| Brockton | 4% | A1 |
| Fall River | 5% | A3 |
| Holyoke | 4% | A1 |
| Lawrence | 4% | A3 |
| Lunenburg | 4% | Aa3 |
| Maynard | 4% | Aa3 |
| New Bedford | 4% | A1 |
| Southbridge | 5% | Aa1 |
| Sturbridge | 4% | Aa3 |
| Webster | 4% | A1 |
| Worcester | 5% | Aa3 |
All figures from the Massachusetts Municipal Data Bank.
Commentary
Lexington does not recognize these communities as peer towns and cities. Many are economically depressed. None have the Aaa bond rating Lexington enjoys. Surely, Lexington’s debt level cannot approach these levels?
Since 2000, Lexington has relied on economic growth and tax increases to grow it’s way out of debt. If real estate values continue to increase, Lexington may be able to absorb additional debt in the next ten years, although the growth will necessarily be insufficient to absorb the largest projects (LHS, 7th elementary school) at current indebtedness levels.
If macroeconomic conditions deteriorate, Lexington will be unable to grow sufficiently to absorb anticipated capital debt. As a result, Lexington will be forced to either join the ranks of the 4%+ communities, or postpone sorely needed school expansion projects.
Voting in December 2017 will determine which path Lexington is to take. If the debt exclusions are all passed, macroeconomic forces will ultimately determine the outcome for Lexington’s school capacity issues.
Moody’s Guide to Municipal Bond Ratings defines:
Aaa
Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edge.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A
Bonds that are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future.
Numeric Modifiers to Ratings
The bonds in the Aa, A, Baa, Ba and B, groups which Moody’s believes possesses the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1, and B1. In 1997, Moody’s started to rate new public finance issues using expanded bond rating symbols to include modifiers 2 and 3 to the existing Numerical 1. The modifier 2 indicates that the issue is in the mid-range of its category and the modifier 3 indicates that it is
in the low end.