Lexington proudly has an Aaa rating at Moody’s, as do most of it’s peer communities. This Aaa rating allows Lexington to borrow at the lowest possible municipal rates.
Why does Lexington have a high bond rating?
How can debt exclusions impact Lexington’s bond rating?
Passing too many debt exclusions will drive up Lexington’s indebtedness to levels which jeopardize its ability to pay. Debt levels may appear too high if a real estate downturn were to reduce valuation of property in town.
Repeated failure to pass debt exclusions may signal limited willingness to tax itself and meet its obligations. This seems to be an unlikely issue as long as Lexington continues to meet its debt commitments.
In our opinion, the 2017 debt exclusion by itself may not jeopardize bond ratings. However, if Lexington were to fund all capital projects planned for the next five years, these bond ratings could easily suffer.
Town leaders have not forecast the full range of capital projects planned. In particular, a new or renovated Lexington High School along with a seventh elementary school could cost the town $375 million. The town would be unable to manage that additional debt on top of current debt levels and debt planned in the 2017 debt exclusion.
Debt levels are understood in relation to the total property of a town, known as the Equalized Valuation (EQV). Lexington’s EQV is now $10 billion, and at that level $100 million in debt is par, and $200 million may begin to stretch. To protect taxpayers from poor local governance, a town with a $10 billion valuation is prohibited from having more than $500 million in debt.
As Lexington’s property values continue to be sustained by a combination of school reputation and general increases in Boston area values, new residents are attracted and investing millions in residential construction. This trend has sustained a sharp increase in equalized valuation since 2000.
As long as these positive trends continue, Lexington may be able to grow its way out of these financial challenges. However, if the real estate bubble were to again break, or Lexington suffered material reputational damage, Lexington could quickly find itself over-extended at these debt levels.