LYNN — The city’s mayor and chief financial officer are optimistic about their plan to improve what they called Lynn’s “very low” bond rating, despite a report last month from Standard & Poor’s that deemed its financial outlook negative.
Standard & Poor’s Financial Services LLC has opted to keep the city’s bond rating, which describes its credit worthiness to potential borrowers and investors, at A-, the same rating it issued in the spring.
“We’re not happy about it,” said Michael Bertino, the city’s chief financial officer. “We’re just committed to working to improve it. It’s all about building reserves. It’s all about closing the structural deficit we currently have, having policies in place and having us follow those financial policies.”
Lynn’s bond rating has been downgraded twice in the past three years.
The rating reflects S&P’s view of the city’s weak financial management, budgetary performance and budgetary flexibility, but cited as strengths its strong economy, debt and contingent liability profile and institutional framework score, according to the report.
According to S&P, “the negative outlook reflects what we believe to be potential long-term credit risks for the city,” following several years of budget deficits. There’s a one-in-three chance the long-term bond rating could be lowered in the next two years, unless the city can stabilize its financial position.
“It’s been lowered because of the ongoing financial crisis the city faces and our inability to have a balanced operating budget,” said Mayor Thomas M. McGee.
The city exhausted a $14 million loan given through state legislation last year to balance the last two years’ budgets but still faces a potential $5 million budget gap this year.
McGee also attributed what he called a “very low” rating to the city’s lack of capital investment, inability to invest in its infrastructure, and lack of a capital plan. The city is working with the Edward J. Collins Center at the University of Massachusetts-Boston to develop a five-year capital plan.
To improve its rating, the mayor said the city needs to increase its reserve funds, which should be at 5 to 10 percent of its $319.5 million budget, but currently sits near zero, and address its structural budget deficits, as its incoming revenues do not cover its recurring expenses, in order to achieve a balanced budget and invest in infrastructure.
An S&P report reads that while the city has raised fees to help balance the budget, along with restoring retiree health care costs as an allowable expense under the net school spending formula, it is unclear that progress has been enough to achieve a balanced budget in the longer term.
According to the report, the city’s financial management told S&P its budgetary imbalance originates from a FY14 state decision disallowing $7.5 million from Lynn’s net school spending calculation.
That decision was related to officials erroneously counting teacher retiree health insurance as an allowable cost toward net school spending for both FY13 and FY14, which led to them playing catch-up until two years ago with meeting their required spending.
“We view the city’s management as weak, with vulnerable financial policies and practices under our FMA methodology, indicating the government lacks policies in many of the areas we believe are most critical to supporting credit quality,” reads the report.
“We believe the hiring of a new full-time CFO will help the city in the long-term to revise budgetary assumptions and institute improved forecasting, but at this time we believe the city continues to use optimistic budgetary assumptions.”
Bertino said he didn’t agree with everything written in the report, citing the negative outlook and one-in-three chance for a lower long-term rating.
“We can fix it,” Bertino said referring to the city’s bond rating and financial situation. “They don’t understand what we know … They don’t know everything. I’m optimistic by collaborating with the City Council, (city) employees and mayor, we’ll be able to make this work.
“We want to improve that rating over time because, in the long run, it saves money for everyone.”