OREANDA-NEWS. Fitch Ratings has assigned the following ratings to the city of Cambridge, Massachusetts' (the city) general obligation (GO) bonds:

--\$75,465,000 GO bonds municipal purpose loan of 2015 'AAA';
--\$37,580,000 GO refunding bonds series 2015 'AAA'.

Proceeds of the series 2015 bonds will be used to finance a school reconstruction project and sewer improvements. Proceeds of the refunding bonds will be used to refund a portion of the city's outstanding GO bonds. The 2015 new issue bonds will sell competitively on March 3rd; the refunding bonds will price via negotiation on March 4th.

In addition, Fitch affirms the 'AAA' rating for the city's outstanding GO bonds totaling approximately \$350 million.

The Rating Outlook is Stable.


The bonds are general obligations of the city, payable from ad valorem taxes on all taxable property in the city, subject to statutory limitations.


EXCEPTIONAL FINANCIAL MANAGEMENT: Management's conservative budgeting practices and prudent use of reserves has helped keep tax levy increases at moderate levels sufficient to cover general operating expenses.

ABOVE-AVERAGE RESERVES AND LIQUIDITY: The city's positive financial profile is characterized by large reserves and ample liquidity. Additionally, the city's levy margin continues to grow favorably to the highest level in the city's history.

ECONOMIC DIVERSITY PROMOTES STABILITY: The presence of higher education, health care, and growing biotechnology and life sciences industries supports the well-diversified economy with low unemployment and above-average wealth levels.

NEW DEVELOPMENT PROMOTES TAX BASE GROWTH: Ongoing development within the city has resulted in notable growth in assessed value and growth is expected to continue.

MODERATE DEBT LEVELS: Debt levels are moderate and expected to remain manageable, aided by the city's rapid rate of amortization. Pension and other post-employment benefit (OPEB) unfunded liabilities and carrying costs are manageable.


The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.


Cambridge is located in Middlesex County across the Charles River from the city of Boston and has a 2013 population of 107,289.


The city is an important economic component for the Boston metropolitan area and Massachusetts as a whole and benefits from the presence of both Harvard University and Massachusetts Institute of Technology. These institutions are the city's two top employers and employ roughly 18% of the city's workforce.

Cambridge continues to experience employment expansion amongst companies in the biotechnology and life and sciences sector. Leading biotech companies, including Novartis, Biogen Idec, Pfizer, Takeda/Millenium, and Sanofi/Genzyme, employ over 9,000 Cambridge workers. In recent years, several major software and internet companies have established research and development operations in Cambridge including Microsoft, Google and EMC/VMware.

The city's well-diversified economy is characterized by a low Nov. 2014 unemployment rate of 3.5% reflective of annual growth in employment of 4.4% and labor force of 3.5%. Per capita money income equals a high 169% of the national average.

Cambridge continues to increase its appeal as a magnet for research and development companies ranging from startups to international companies. Commercial leasing activity has been strong, and companies have been expanding facilities. Assessed value (AV) performance reflects this activity as well as growth in residential values. AV grew 11% in fiscal 2015 to \$30.1 billion or an exceptionally high \$280,522 per capita. The city is projecting moderate increases in AV in fiscal years 2016 through 2019 which is considered to be realistic by Fitch based on new commercial and residential construction underway.

The city's ten largest taxpayers account for an above-average 21% of the total tax base, but Harvard and MIT together total 9%. Most commercial property owners own multiple parcels with many different uses and tenants, providing considerable diversification of the city's property tax revenue base.


Exceptional financial management and planning are demonstrated by the city's strong financial position. The city prudently updates its five-year financial forecast each year to reflect changes in economic activity helping to maintain moderate tax levy increases and a continued strategic use of its reserves. Reserve levels have consistently remained above-average. The unrestricted general fund balance at fiscal end 2014 was \$225.7 million, equivalent to a strong 44.9% of spending.

The city experienced a \$31.5 million operating surplus (6.3% of spending), after transfers, for fiscal 2014 due to conservative estimates of non-property tax items. Expenses also came in lower than estimated helping avoid the use of reserves, which has typically been the city's experience. Property taxes generate the most general fund revenues and accounted for 61.5% of the total in fiscal 2014.

Cambridge's \$161 million of certified free cash for fiscal 2014 (up from \$142 million in fiscal 2013) is the largest amount in the city's history. The calculation of free cash, performed annually by the Massachusetts State Dept. of Revenue, is based on the city's financial statements prepared in accordance with Uniform Municipal Accounting System principles which differ from GAAP. Free cash is surplus revenues less uncollected and overdue property taxes from prior years and is an amount considered available funds for appropriation not required to be included in the annual tax levy.

The city's excess tax levy limit increased from \$118 million in fiscal 2013 to \$134 million in fiscal 2014, a 14% increase. This excess levy capacity totals 26% of the fiscal 2015 operating budget of \$524 million. Fitch finds that Cambridge's substantial excess levy capacity under Proposition 2 1/2, along with its considerable reserve levels, provides the city with significant financial flexibility.

The fiscal 2015 operating budget grew by a manageable 2.9% (compared to 3.8% in fiscal 2014), attributable to an increase in employee salary and benefit costs as well as a \$2 million allocation to the city's OPEB trust fund. The tax levy increased by \$12.9 million, or 3.93%, to \$341.5 million and is being supplemented in part by the use of \$9 million in free cash. Management has indicated that fiscal year to date performance has revenues trending positively compared to budget and is projecting surplus results for the fiscal year.


Overall debt equals a moderate \$4,697 per capita but is lower as a percentage of fiscal 2015 market value at 1.7%. The city plans to issue approximately \$290 million of additional debt over the next five years. Debt levels are expected to rise only modestly given the city's rapid amortization rate; approximately 82% of debt is retired within 10 years. Furthermore, approximately 38% of the total additional debt is planned to be supported by user fees.


The Cambridge Retirement System was 79% funded as of the Jan. 1, 2014 valuation date and had an unfunded actuarially accrued liability of \$250 million (a low 0.8% of AV). Using Fitch's more conservative 7% return rate, the plan was estimated at a more modest 72% funded. The city contributed \$26 million for fiscal 2014 equal to 100% of its annual required contribution (ARC) and approximately 4.3% of total governmental spending. The city paid \$22.2 million towards OPEB contributions in fiscal 2014 which accounted for 47% of total OPEB costs.

The city's unfunded OPEB liability totaled \$574 million as of June 30, 2014, and represented a moderate 1.9% of AV. Management has recently negotiated increases in employee health insurance contribution rates which have not been fully incorporated into the valuation and should help lower future liability calculations. City management created an OPEB trust fund in December 2009 with an initial contribution of \$2 million and has made annual contributions of \$1 million in fiscal 2013, and \$2 million in fiscals 2014 and 2015. Future annual contributions are planned at \$2 million for each of the next four fiscal years.

Total carrying costs for debt service, pension and OPEB pay-go equal a manageable 16.1% of total fiscal 2014 governmental spending.