Will Boston lose its competitive edge post-pandemic as more companies allow employees to work remotely in lower-cost locations?
It’s a question on the minds of local business leaders these days. But two major credit agencies predict a stable, if not rosy, future for many years to come.
Both Moody’s and S&P Global last month again gave Boston a “AAA” credit rating, their highest possible grade, as the city prepared for its next bond sale on Wednesday. What makes these ratings noteworthy this time: Both agencies are bullish on Boston’s finances despite COVID-19 and the economic devastation it has wrought.
These high ratings will be crucial for the Walsh administration as it seeks the lowest interest rates possible on the latest round of bonds, totaling an estimated $270 million. That amount would be on par with the city’s record, set in 2015. Low interest rates are fueling more refinancing than normal and several projects in the city’s capital plan are moving from the design phase into construction.
Of that amount, an estimated $173 million will be new borrowing ― bringing the city’s total debt to nearly $1.4 billion ― and $97 million will go to refinance older debt. The new money will include $35 million for Boston’s first “Social Bonds,” primarily for affordable housing work, and $25 million for the city’s first “Green Bonds,” for a range of energy efficiency and climate resiliency projects.
Unlike previous Boston bond sales, individual investors will be able to get in on this sale directly, with the ability to place orders for bonds starting at $5,000 through one of several qualified brokerages on Wednesday morning.
“All of these bonds are funding local projects,” said Drew Smith, the Walsh administration’s head of treasury. “To the extent investors want to be a part of the local projects they see every day, we want to make sure they have the opportunity.”
Boston typically holds auctions in which investment banks compete for the right to resell the bonds. Instead, this round will be driven by a negotiated sale with Bank of America and Siebert Williams Shank & Co. leading the deal. They are expected to buy what doesn’t get sold during Wednesday’s auction to institutional investors and the general public.
Analysts at Moody’s and S&P cited a number of factors behind the decision to continue to give Boston high marks for its ability to pay off bonds over the next 20 years. Most notably, most of Boston’s revenue comes from property taxes, a usually steady source.
Other cities are far more dependent on volatile revenue streams: Think casino taxes, sales taxes, or state aid. The New York Times, citing a National Tax Journal study, recently reported that of more than 40 major US cities, Boston is expected to suffer the smallest revenue decline this fiscal year.
Moody’s analyst Nicholas Lehman noted that the Walsh administration has been responsible about paying down debt, and he points to the rainy day fund that Boston has grown during the boom years of the last decade. This cushion now totals about $1.2 billion, or about one-third of the city’s annual expenses.
“They’ve seen unprecedented growth,” Lehman said. “The development in and around the city is at historical levels. The [property] tax base has doubled since 2011. That has given them the ability to ride that economic wave.”
Analysts said it’s difficult to predict how much of a role remote work will play in the economy once the pandemic is over. But they also said Boston should be more insulated from its effects than other major cities.
One reason for optimism: the thick cluster of colleges and universities in and near the city that are typically beehives of economic activity, including through the generation of spinoff businesses.
“They’re going to continue to help anchor an economy that is knowledge-driven,” said Christian Richards, an analyst at S&P Global.
Another positive the two rating agencies cited: The Boston area is a global hub for life sciences. Lab work is tough, if not impossible, to do at home.
Richards also noted that recent construction permit activity in Boston isn’t far off what it was prior to the pandemic. The roughly 8 million square feet of commercial permit activity expected this calendar year will mirror the city’s performance in recent years, according to the S&P report. Much of it has been for lab and research spaces for life sciences companies.
“There is some level of continued interest in investing in the city, particularly in the commercial sector, that lends credibility to the idea that it is going to continue to be this economic center,” Richards said.
The S&P analysts, in their report, note that while Boston is seeing declines in hotel and restaurant taxes, the city’s management is making the necessary adjustments to balance the budget.
As with any investment, there is still some risk. The Moody’s and S&P reports cited Boston’s waterfront locale as a climate-related risk given the potential exposure to sea-level rise and hurricanes. The city’s large pension and retiree benefits obligations were noted as financial risks.
City officials typically sell bonds every spring to raise money for capital projects and to refinance older debt at better interest rates. But the pandemic threw the credit markets into turmoil in the spring this year, so the Walsh administration decided to wait until the fall to raise the money.