Fitch Rates Waterbury, CT GOs 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to the following City of Waterbury, CT (the city) general obligation (GO) bonds:

--$7,925,000 GO bonds, 2010 subseries A;

--$8,000,000 GO bonds, 2010 subseries B, taxable Build America Bonds;

--$24,175,000 GO bonds, 2010 subseries C, taxable Recovery Zone Economic Development Bonds;

--$4,900,000 GO bonds, 2010 subseries D, taxable Qualified Energy Conservation Bonds.

The bonds are expected to sell via negotiation on Aug. 11, 2010.

In addition, Fitch affirms its rating on the following other city GO bonds:

--$72.8 million in outstanding GO bonds at 'A+';

--$35.3 million in outstanding GO special capital reserve fund (SCRF) bonds at 'AA-';

--$313 million in outstanding GO taxable pension obligation bonds, series 2009, at 'A+'.

The Rating Outlook is Stable.

RATING RATIONALE:

--Strong management team that has made prudent budget decisions resulting in the maintenance of financial stability within the city.

--While SCRF bonds, scheduled to mature in 2017, remain outstanding, the city must maintain certain financial covenants to avoid placement of city under watch of the State's Assistance Board.

--Economy is diversifying and becoming more business and service oriented while still maintaining a strong manufacturing component.

--Debt levels are above average including the city's outstanding pension obligation bonds and levels are expected to increase with implementation of city's capital improvement plan.

--Wealth levels are below average and unemployment rates continue to exceed state and national levels.

--The rating on the SCRF bonds is based on the state of Connecticut's covenant to appropriate the replenishment of any draw on the special capital reserve fund supporting the bonds (see Fitch's rating release on State of Connecticut dated June 3, 2010).

RATING DRIVERS:

--City's ability to maintain financial stability and fund balance levels within policy limits considering anticipated increase in healthcare and retirement costs and reductions in state aid.

--Maintenance of manageable debt levels in light of upcoming plans for additional debt.

SECURITY:

The bonds are general obligations of the city and are backed by the city's full faith and credit and unlimited taxing authority. The SCRF bonds are additionally supported by the state's covenant to appropriate funds to replenish any draw on the special capital reserve fund supporting the SCRF bonds.

CREDIT SUMMARY:

Waterbury is located in the west-central portion of Connecticut, 21 miles north of New Haven and, with direct access to Interstate 84, there is easy access to Hartford and for travel to Boston and Northern New England. The city's diverse economy is driven by manufacturing but also benefits from the higher education institutions, including Post University and a branch of the University of Connecticut. There has been recent growth in off-site medical services, including new office building construction, supporting the two hospitals in the city, Waterbury Hospital and Saint Mary's. Considerable retail expansion has occurred in the city in the past few years and the opening of a new Super WalMart is in the planning stages. The environmental remediation and clean-up of underutilized properties in the city is spurring additional interest in expansions and development from businesses and developers and is expected to provide future tax base growth. While progress has been made in improving the city's economy, wealth indicators remain below state and national averages and high unemployment, at 14.1% in May, is above the state's current rate of 8.8%. The city's large $5.3 billion tax base grew a strong 49% in fiscal 2009 as a result of a 2007 revaluation and taxpayer concentration is low with the top ten taxpayers at 7%. The city's population has remained relatively flat at 107,143 since 2000.

Waterbury's financial operations continue to remain stable with a sizable budgetary surplus in fiscal 2009 and estimated surplus in fiscal 2010. Fiscal 2009 ended with a $5.1 million budgetary surplus and since the city was close to its required 5% unreserved general fund balance limit, it appropriated $2 million to its capital improvement fund and designated $3 million to be used for the fiscal 2010 budget. The city's 2002 deficit funding bonds require the city to appropriate funds in excess of 5% of reserves for pay-as-you-go funding of capital, transfers to other funds requiring subsidies, or the redemption of final maturity SCRF bonds. The city has been putting any excess surplus monies toward capital improvements and leaving the SCRF bonds outstanding. While the SCRF bonds are outstanding through 2017, in order to avoid future state assistance board oversight, the city must maintain certain financial covenants including the funding of 100% of its annual required pension contribution and any annual operating deficit cannot be in excess of a negative 0.5% of the budget. In addition, the city estimates surplus operations in fiscal 2010 of approximately $250,000 due primarily to favorable property tax collections in excess of the budgeted 96% collection rate, a freeze on filling vacant positions, energy savings from new energy-efficient lighting installed city-wide, and holding the line on expenses. The fiscal 2010 budget included a $3 million appropriation from the unreserved general fund, but instead of drawing these funds the city used $3 million in one-time savings from the city's issuance of its series 2009 pension obligation bonds (POBs) to fund general operating expenses. This helped offset the unbudgeted decrease in state aid due to the late approval of the state's budget after formal adoption of the city's budget. The city's fiscal 2011 budget assumes a 4.8% property tax increase, cuts in school and city department budgets, and elimination of 14 vacant positions and the holding vacant of 12 others. The city anticipates an increase in healthcare costs and continued reduction in non-property-tax revenues and has included a $3 million appropriation from reserves to balance the fiscal 2011 budget. The city's unreserved fund balance of $21 million at fiscal year end 2009 is estimated to remain at 4.9% of budgetary based expenditures, in line with SCRF bond requirements and the city's formal general fund balance policy of 5%-8%.

The city's debt levels increased substantially in 2009 with the issuance of its $313 million pension obligation bonds, and with this new issuance stand at an above-average $4,426 per capita and 6.3% of full value, not including self-supporting sewer debt. Debt ratios net of the POBs is much lower at $1,512 and 2.1%. The issuance of the POBs has greatly reduced the city's unfunded pension liability and POB debt service is currently offset by the city's reduced annual required pension contribution. The city is trying to catch up on years of little or no projects and has authorized $355 million in capital improvements. After issuance of the series 2010 bonds and the city's 2009 GO issuance, the city anticipates additional bond financing of $118 million over the next four years beginning in fiscal 2011. As a percentage of budget, the city has structured anticipated debt service at a level not to exceed 7% of general fund expenditures. Future debt service will be supported by draws on the city's debt service fund which currently has an unrestricted fund balance of $3.4 million and a restricted balance of $6.9 million, which will be maintained at an amount equal to maximum annual debt service through April 2017 as a requirement of the SCRF bonds. The city's unfunded pension liability is approximately $160 million as of July 1, 2009, equivalent to a 70.4% funded rate. The city's annual required contribution (ARC) is $16.5 million and as in fiscal 2010 will be fully funded in fiscal 2011. The city's accrued other post employment benefit (OPEB) liability is a very high $770 million as of July 1, 2008. The city's OPEB funding strategy is to fund existing retiree's costs on a pay-as-you-go basis and to do a combination of pay-as-you go funding for active employees hired prior to 2004 and payment of 100% of ARC for employees hired after 2004. The city has established an OPEB reserve fund to account for normal cost requirements for active employees. It is currently funded at $9.3 million and an additional contribution of $2.3 million has been budgeted for 2011.

Applicable criteria available on Fitch's website at www.fitchratings.com:

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

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

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Considerations for Taxable/Build America Bonds Investors

The following sector credit profile is provided as background for investors new to the municipal market.

Local Government General Obligation Bonds:

The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. The average local government general obligation rating is 'AA' with approximately 85% rated at or above 'AA-' and 1% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility.

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

Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492466

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493048

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.