Feb. 2015: Many CPA communities are issuing bonds against their future CPA revenue stream in order to fund larger projects. In fact, over 79 communities have issued bonds for 182 different CPA projects, raising roughly $310 million through bonding (note: figures include projects approved through end of FY15).
The majority of these projects are open space projects, resulting in the protection of over 6,000 acres of open space. Many bonds have also been issued to fund projects in the other CPA categories: approximately $66 million for historic preservation, $15 million for community housing, and $22 million for recreation.
The authorization to bond CPA funds is in Section 11 of the Community Preservation Act (MGL c.44B), which states that CPA communities may issue general obligation bonds in anticipation of revenues to be raised through the local CPA surcharge. Note that in calculating how much of a bond can be issued under CPA, a community can only bond against the local surcharge portion of their CPA revenue, not the trust fund matching portion.
What would happen to a community’s bond obligation if CPA were revoked at some point in the future? MGL c. 44B, Section 16(b) addresses this issue by requiring that the local surcharge remain in effect until all obligations incurred prior to revocation are fully discharged. Since no community has ever revoked the CPA, the procedures have not yet been tested, but there are two general frameworks to consider. Either the surcharge would remain at the existing percentage until enough revenue is generated to repay the debt obligations; or, the surcharge would be reduced to the minimum level required to annually fund the debt payments. In either framework, new CPA projects would not be funded after revocation of the CPA and the surcharge would terminate completely once enough revenue is raised to fulfill the debt obligations.
The downside to bonding, as with most loans, is that it is ultimately more costly due to the interest that is charged. In addition, bonded projects may be more difficult to pass at Town Meeting or City Council. It takes a 2/3 vote of the legislative body to approve a bonded project, while almost all other CPA projects require only a majority vote. Nonetheless, bonding can be a powerful tool to successfully achieve community preservation projects that come with larger price tags.
Town of Sharon Case Study
To illustrate how CPA projects can be accomplished through issuance of bonds, this article highlights an open space and recreation acquisition project in the Town of Sharon. The town used a combination of CPA funds and other town funds to purchase a 57-acre lake-front property that had been used as a summer camp throughout most of the 20th century. This was one of only three summer camps that remain in Sharon, which was once known as a summer retreat area, and the property is highly valued due to its size, location on Lake Massapoag, wildlife habitat, and opportunities for passive and active recreation. The property had been listed as a priority in the town’s Open Space Plan for decades.
The town required $4.85 million to purchase the property. With Sharon’s local surcharge collections of approximately $330,000 annually, it would have been impossible to fund the project through current available CPA funds. In order to secure the land, the Town voted to raise $3.65 million from town funds and $1.2 million from CPA, both of which were largely raised through issuing bonds with a repayment term of 10 years (the CPA portion used $225,000 from existing CPA funds, and $975,000 was borrowed). Using an interest rate of 5%, the annual debt payment on the CPA portion of the bond starts at $144,000 in year one and drops to $100,000 by year ten.
Can CPA Affect a Municipality's Bond Rating?
In the case of Northampton, CPA actually contributed to a two-step upgrade in their city bond rating, from A+ to Aa2. The upgrade came just two weeks after Northampton voters rejected an attempt to revoke CPA with 70% of the electorate voting to keep the Act in place. This willingness to pay for municipal programs is one of the primary factors that Moody's Investors Services evaluates when considering a city or town's bond rating.
Ratings of "Aa", the second-highest Moody's rating, are judged to be of high quality and are subject to very low credit risk. David Narkewicz, the mayor of Northampton, credited voters' decision to keep the Community Preservation Act as a major factor in the upgrade, saying that "despite tough economic times, Northampton residents have shown significant community support.” For more information, check out the following resources: