NEW YORK--()--Fitch Ratings has assigned the following rating to the City of New Haven, CT's (the city) general obligation (GO) bonds:
--$13.34 million GO refunding bonds, series 2010B, 'A+'.
The bonds are scheduled to be sell via negotiation during the week of Oct. 11, 2010.
In addition, Fitch has affirmed the following outstanding ratings for the city:
--$508 million GO bonds at 'A+'.
The Rating Outlook is Stable.
--New Haven's economy benefits from the presence of higher educational and healthcare institutions, including Yale University and Yale-New Haven Hospital, which continue to attract investment from biotechnology, pharmaceutical and life-sciences companies.
--The city's reserves are adequate and provide limited financial flexibility; the revenue base includes a significant proportion of economically sensitive intergovernmental aid.
--The city's strong management team employed a monthly reporting system in fiscal 2009 as an additional tool to help continue its history of balanced budgets.
--An above-average debt burden and growing unfunded pension and other post-employment benefit (OPEB) liabilities will continue to pressure financial operations.
--Wealth levels are below average and unemployment rates exceed state and national averages.
KEY RATING DRIVERS:
--Ability to build reserve levels to meet management's target level.
--Ability to manage increasing employee benefit and workers' compensation costs through prudent expenditure controls and new revenue sources.
The bonds are secured by the city's full faith and credit and unlimited taxing authority.
New Haven is located on the north shore of the Long Island Sound about 75 miles north of New York City. The city is a regional center for higher education, health care, transportation and the arts. In addition to Yale University, the city is also home to Southern Connecticut University, Albertus Magnus College and Gateway Community College. Yale is the city's top employer (10,500) followed by Yale-New Haven Hospital (5,800), AT&T (5,000) and Hospital of St. Raphael (3,400). The presence of Yale and Yale New Haven Hospital provide stability to the economy and continue to attract new development and investment from biotechnology, pharmaceutical and life-sciences companies. The top 10 taxpayers represent an average 7.7% with Yale being the largest at 1.5%. Wealth levels continue to trend below state and national averages and the city's unemployment rate is high at 13.5% for July 2010, exceeding the state's rate of 9.3% and the prior year's rate of 11.9% for the city.
The city has experienced some pressure on its financial operations but has so far been able to manage through the recession with stable results. Property taxes, representing 45% of general fund revenues, have increased annually due to growth in the tax base from new developments. Intergovernmental aid also represented 45% of general fund revenues in fiscal 2009 and after a modest decline experienced in fiscal 2010, the city has budgeted a 2.3% reduction for fiscal 2011. Due to the city's reliance on this revenue source, Fitch is concerned that further reductions by the state may put added fiscal pressure on the city. Beginning in fiscal 2009, the city's Board of Alderman instituted a monthly reporting process for all departments to ensure continual monitoring of financial results so proper action could be taken during mid-year if necessary to avoid deficit operations. This process has contributed to the city's positive year-end operations with modest growth in the city's fund balance for 2009, and an increase projected for 2010. The city had a net surplus at fiscal year-end 2009 of $519,000, due in part to the $4.5 million sale of assets, resulting in an unreserved fund balance of $16 million, or 3.4% of spending, below the city's target of 5%. During fiscal 2010, the city was able to negotiate an increase of $2.5 million per annum in the PILOT payment it receives for Yale University and, in addition to strong tax collections, building permits came in over budget by $4 million. The city was forced to implement expenditure controls, including substantial reductions in staff, the closing of some senior centers and reduced library hours as employee benefit and workers' compensation costs continue to rise. As a result of these actions, the city projects a surplus of $151,000 for fiscal 2010 and an unreserved fund balance of $16.2 million equivalent to a low 3.5% of spending. The current level of reserves limits the city's financial flexibility and if reduced could put pressure on the city's rating.
The fiscal 2011 budget is balanced and includes a small revenue increase of 1.63% offset by expense increases of 1.63% attributable mainly to higher costs for workers' compensation, pension and medical benefits. The city will reduce school positions and has projected some wage savings this year as it is undergoing contract negotiations with many of the city's bargaining units. The city also implemented Innovation Based Budgeting which is anticipated to yield an initial gain of $5.1 million as the city's agencies and departments work to achieve revenue gains and expense reductions throughout areas of the city.
The city's debt levels are above-average with net overall debt per capita at $4,097 and debt to full value at 5.41%. Partially mitigating this is the city's favorable 72% principal amortization rate in 10 years. For fiscal 2011, debt service represents 13.7% of general fund expenses but annual debt service begins to descend next year. The city's capital budget for fiscal 2011 includes $28.6 million in potential new debt, with the same average amount projected through 2015.
The city has historically made 100% of the annual required contributions (ARC) to its two pension systems, but the asset values have experienced recent declines. The unfunded liabilities as of June 30, 2009 for the city employee retirement fund were $156 million and $238 million for the police and fire fund, close to a low 50% funded level. The city approved the creation of an OPEB trust with an initial funding of $225,000 in fiscal 2010 and has budgeted a contribution of $50,000 for fiscal 2011. The city's pay-go in fiscal 2009 was $18.9 million equivalent to 45% of its ARC and the OPEB liability as of June 30, 2010, was a high $414 million. The city's self-insurance fund has a projected deficit balance of $16.1 million for fiscal 2010, $8.8 million of which represents case reverves. The city has increased its general fund contribution to this fund the last few years and budgeted $4 million in fiscal 2011 up from $3 million in fiscal 2010. The city has indicated it may choose to bond out the operational deficit in the future.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, LoanPerformance, Inc., and IHS Global Insight.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria