Fitch Affirms Dover, Delaware's GOs at 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Dover, Delaware's (the city) general obligation (GO) bonds as part of its continuous surveillance effort:

-- Approximately $1.8 million general obligation refunding bonds, series 2003 affirmed at 'AA'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Dover's economic base is anchored by state and county government and the Dover Air Force Base (AFB) contributing to unemployment rates that consistently outperform the national average.

--The city's debt burden is very low with a short final maturity and limited future capital needs.

--Solid general fund balances are expected to weaken but remain adequate over the near-term as a result of planned pay-as-you-go capital spending and revenue pressures due to general economic conditions.

--The city's utility enterprise funds, which subsidize a considerable portion of the general fund budget, continue to perform solidly.

--Comprehensive financial and debt policies have been adopted to promote fiscal responsibility.

KEY RATING DRIVER:

Fitch considers the city's ability to balance its budget without the use of additional fund balance through the adoption of revenue enhancements and/or expenditure cuts a key rating driver.

SECURITY:

The bonds are general obligations of the city for the payment of which the city's full faith and credit and unlimited taxing power are pledged.

CREDIT SUMMARY:

As the Capital of the State of Delaware and County seat for Kent County, Dover's employment base is heavily influenced by the stable government sector. The city is also home to Dover Air Force Base, which employs approximately 6,400 military and civilian personnel. As the largest and busiest air freight terminal in the Department of Defense, Dover AFB serves as a focal point for military cargo movement to Europe and the Middle East. Dover AFB is also the only domestic mortuary for overseas casualties. Delaware State University and Bayhealth Medical Center also provide stable sources of employment. Bayhealth (revenue bonds rated 'AA-'; Stable Outlook by Fitch), the city's largest private sector employer, is completing major upgrades to its flagship facility and the construction of a new emergency department. The city's favorable tax environment and proximity to major east coast markets also make it a center of commerce and employment for central Delaware. Dover Downs, the city's largest taxpayer, continues to expand and improve its facilities adding video lottery machines, restaurants, and retail, while recently legalized sports betting and table games should enhance its competitive position. Housing foreclosure rates are generally consistent with national trends. Building activity has certainly slowed, but officials report a modest number of residential construction projects continuing to move forward throughout the city. Dover's 8.8% unemployment rate in December 2009 remains lower than the national average, but job losses over the prior 12 months have been considerable, particularly in construction, retail, and services.

General fund revenues have been pressured, in particular realty transfer taxes, with the downturn in the economy and housing market. To date the city has primarily addressed its revenue shortfalls with spending cuts. The fiscal 2010 budget totals $35.4 million, or 3.1% less than the year prior when adjusted for the use of prior year balances. The fiscal 2010 budget includes nine furlough days and continues the hiring freeze put in place in 2009. All departments were required to hold non-strategic budget levels flat, street maintenance was reduced by $500,000, and the city deferred $2 million in capital projects and transfers to the capital asset reserve fund. These measures enabled the city to maintain its fund balance policy (8% in undesignated/unreserved fund balance plus 2% for contingency) and to maintain the number of active employees and services without increasing existing taxes or fees. The flexibility to address budgetary pressures via additional spending cuts is fairly limited at this time.

The city also used a portion of its fund balance to plug the revenue gaps. Fiscal 2009 closed with a $900,727 loss, the city's first net deficit in five years. The city is anticipating similar results in fiscal 2010, which would result in a still healthy unreserved fund balance in excess of 20% of spending. Fitch does anticipate the general fund reserve to be drawn down over the next several years to levels closer to the city's formal reserve policies as the city contributes its share of the cost of constructing the regional library.

City officials are cognizant of the need to implement fee or tax increases or reduce core services presently provided to maintain budgetary stability going forward. Among the revenue alternatives discussed is an increase in trash collection fees, an increase in its property tax rate (presently a low $0.33 per $100 AV) or an increase in the level of utility transfers. Utility transfers have averaged over $10 million or more than 30% of total spending. The transfers are viewed as returns on taxpayers' investment in the utilities while serving to keep taxes low and spread the cost of government among residential and commercial payers. The transfer amount is set at a reasonable 6.5% of electric fund revenues and 4.5% of water and sewer fund revenues (city policy allow transfers of up to 8% of utility fund revenues). Fitch considers the city's ability to balance its budget without further eroding its unreserved, undesignated fund balance a key rating driver.

The city's debt burden is very low, reflecting its regular use of pay-go capital. The city has less than $2 million in GO bonds outstanding maturing through 2016. GO debt service will total less than 1% of total spending in fiscal 2010. The 2010-2014 capital improvement plan (CIP) includes $42 million for general fund projects, the focal point of which is a new $23 million regional library being built in conjunction with the state and county. The city indicated it may need to issue a small amount of GO bonds, no more than $5 million in principal amount, for the library project if other funding sources do not materialize as planned. No other GO debt is anticipated.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:

'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.

'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.

Additional information is available at 'www.fitchratings.com'.

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