Boston has received five bond ratings upgrades in the past seven years, more than any other major city. The upgrades, due in large measure to improvements in the financial management of the city, have saved taxpayers millions of dollars in interest costs.
Sound fiscal management has generated five consecutive balanced city budgets, enabling Boston to avoid costly borrowing to finance deficits. This is not the case at all levels of government. In fiscal 1992, the federal government will spend over $ 227 billion topay interest on the national debt. Massachusetts will spend about $ 278 million in fiscal 1992 to pay interest on deficit borrowing.
Bond Rating History
When Mayor Raymond L. Flynn took office in 1984, Boston's general obligation debt was rated Bal by Moody's Investors Service and BBB-plus by Standard & Poor's Corp. Bal is a junk bond rating and BBB-plus is one of the lowest investment-grade ratings.
Since 1984 the city's ratings have risen faster than those of any major city in the nation. In the last seven years Boston has received three rating upgrades from Moody's and two from Standard & Poor's.
It is now rated A by both of these agencies, the highest rating in the city's history. Boston is the only major Northeastern municipal credit to have a higher rating now than in 1988. Higher bond ratings reflect an increased level of investor confidence and result in reduced interest costs, as detailed below.
'Strong Management' Is Key
Boston was still recovering from the effects of Proposition 2 1/2 when Mayor Flynn took office, and had been operting in the red for several years. Since fiscal 1988, however, the city has balanced five consecutive budgets, expects a sixth in fiscal 1991, and budgeted for a seventh in fiscal 1992.
Additionally, Boston's general fund equity, which stood at only $7 milion in 1984, reached $126 million in 1990, the highest level in Boston's history. The bond rating agencies and the financial press have cited improvements in Boston's financial management as key to the city's improved financial performance.
Mayor Flynn's management initiatives include: adopting program budgeting that ties budget dollars to achievement of specific goals; rationalizing the capital budgeting process through the creation of the Office of Capital Planing; improving cash management to maximize investment income and minimize cash flow borrowing; adopting a sophisticated accounting system based on generally accepted accounting principles; and enhancing revenue collection efforts to bring about the lowest tax delinquency rate in Boston history.
To improve its cash-flow position for the coming fiscal year, the city has decided to send real estate tax bills on a quarterly basis, which should obviate the need for any short-term borrowing. As a result of these initiatives, Boston was recently recognized as a candidate for most improved city in Financial World magazine's study of the financial management of America's 80 largest cities.
Savings to Taxpayers
The direct financial benefits of Boston's improved fiscal standing are the lower interest rates the city pays on its debt as a result of its simproved bond ratings. To quantify these debt service savings we estimated the difference between the actual interest rates on city borrwings since 1985 with the interest rates the city would have received if its bond ratings had remained at the Ba1/BBB-plus level.
The analysis shows that Boston's improved bond ratings have generated a savings of approximately $28 million over the life of the 10 general obligation borrowings since 1985. The $28 million represents almost 8% of the total interest on these issues. In other words, we received an 8% "discount" because of our management improvements.
This analysis does not include savings realized by Boston City Hospital as a result of the city's ability to finance the reconstruction project with revenue bonds insured by the Fedeal Housing Administration. Without the insurance the issue would probably not have received an investment grade rating, since the only security would have been the revenues generated by the hospital.
With the FHA insurance, however, the bonds were sold with Aa/AA ratings, saving the city approximately $129.5 million -- $40.4 million in present value savings -- in interest costs over the 30-year life of the issue. Additionally, because these were revenue bonds, the city was able to preserve its general obligation debt capacity for projects that do not generate their own revenues.
The city's proven management record was key to obtaining the FHA insurance. Indeed, the Boston City Hospital financing was the first time a publicly owned, publicly managed hospital qualified for the FHA program.
Boston's recent sale of $98.2 million of general obligation bonds is a recent example of the financial benefits of sound fiscal management. The overall interest cost, including costs of issuance and the insurance premium, was 6.83%, the lowest interest rate on a city issue in at least the past 10 years.
This interest rate compares favorably with that on the $567.4 million general obligation issu sold by Massachusetts the previous week, which was 7.61%. Also, the city's insurance premium amounted to only 0.40% of total principal and interest payments compared to 1.50% of the commonwealth's debt service.
In sum, the city would have had to pay an additional $7.2 million if it had received the same interest rate and insurance premium as the commonwealth.
Savings and Services
Lower debt service costs mean that the city can provide better services for the same level of tax support.
The $28 million cumulative debt service savings is equivalent to approximately $1.4 million per year.
To put this figure in perspective, the annual debt service savings are enough to pay the salaries of 35 policement, renovate nine parks and playgrounds, renovate eight libraries, repair 22 swimming pools, or construct a residential facility for children with AIDS.
Another benefit of sound fiscal management is the city's improved public infrastructure. Prior to 1985, when the Mayor's Office of Capital Planning was created, the city did not have a long-term spending and improvement plan for its public infrastructure -- roads, parks, schools, libraries, and police and fire stations, among others.
In the six years of its existence, however, the planning office has been responsible for a significant increase in the level of infrastructure investment, thereby protecting and preserving the city's capital assets and creating jobs in the construction sector.
The planning office's mission is to evaluate the condition of the city's capital stock, forecast the timing and financial requirements of new construction and rehabilitation, and recommend allocation of current and future resources to meet the city's infrastructure and capital requirements.
The largest project contained in the capital plan, and indeed in the city's history, is the $170 million Boston City Hospital reconstruction project. A new city hospital will ensure access to quality health care for Boston's poor and indigent population well into the next century. Boston's unique financing of this essential project saved the hospital millions of dollars in interest costs.
Mayor Flynn's first two terms in office have resulted in significant improvements in the city's financial performance. His commitment to maintain balanced budgets and improve overall fiscal management has produced the following results:
* Six consecutive balanced budgets.
* Five ratings upgrades from Moody's and Standard & Poor's resulting in an A rating from both agencies, the highest in the city's history.
* A general fund Equity level of $126 million, also an all-time high for Boston.
* A gross savings of approximately $28 million in debt service costs on the 10 city borrowings since 1985.
* A gross savings of approximately $129 million on the unique financing of the Boston City Hospital reconstruction project.
* Recognition from Financial World magazine as a candidate for most improved city in terms of financial management.
* A vastly improved public infrastructure program resulting from the creation of the Office of Capital Planning.
* Improved cash management and investment policies that have enabled the city to avoid cash flow borrowing since fiscal 1987.
Mr. Jackson is collector-treasurer of Boston.
