NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating to the City of New Haven, CT's (the city) general obligation (GO) bonds:
--$28.5 million GO bonds, series 2011A, 'A+'.
The bonds are scheduled to sell via competitive sale during the week of March 14, 2011. Proceeds will be used to retire outstanding bond anticipation notes and fund various capital and school improvement projects.
In addition, Fitch affirms the following outstanding rating for the city:
--$508 million GO bonds at 'A+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--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.
--Financial flexibility remains limited due to weak reserve levels and a revenue base that includes a significant proportion of economically sensitive intergovernmental aid.
--Management is strong as evidenced by a recently employed monthly reporting system enabling it to achieve balanced budgeted operations for the last five years.
--The debt burden is high and growing unfunded pension and other post-employment benefit (OPEB) liabilities will continue to pressure financial operations.
--Wealth and income levels are below average and unemployment rates exceed state and national averages.
KEY RATING DRIVERS:
--Restoration of reserve levels to meet management's target level may prove challenging in light of unsettled labor contracts and the large structural deficit in the city's self-insurance fund.
--Management's continued ability to control expenditures attributable to rising employee benefit and workers' compensation costs are a key credit factor.
SECURITY:
The bonds are secured by the city's full faith and credit and unlimited taxing authority.
CREDIT SUMMARY:
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. Wealth levels continue to trend below state and national averages and the city's unemployment rate remains high and grew to 13% in December 2010, exceeding the state and national rates of 8.6% and 9.1%, respectively, which each fell from the prior period.
The city continues to experience pressure on its financial operations but has been able to manage through the recession with stable results. Property tax revenues represent 43.3% of general fund revenues and have increased annually due to growth in the tax base from new developments. Intergovernmental aid declined modestly and totaled a high 48% of general fund revenues in fiscal 2010; the city budgeted a 2.3% reduction for fiscal 2011. Fitch remains concerned that further reductions by the state may put added fiscal pressure on the city. The city's Board of Alderman prudently instituted a city-wide monthly reporting process in 2009 to ensure regular monitoring of financial results and timely responses to avoid deficit operations. The modest surplus in fiscal 2009 was largely due to a $4.5 million sale of assets, yielding a still low unreserved fund balance totaling 3.4% of spending. While the city maintains a target unreserved balance of 5%, achievement of that goal seems unlikely over the near term.
Fiscal 2010 proved challenging for the city but management made headway towards longer-term financial stability. On the revenue side, the city negotiated an increase of in the annual PILOT payment it receives for Yale University, property tax collections remain strong and building permits came in over budget. The city implemented significant expenditure controls, including substantial reductions in staff, the closing of some senior centers and reduced library hours as employee benefit and workers' compensation costs rose. As a result of these actions, the city met its target of another modest operating surplus for fiscal 2010. Despite the surplus, audited results prepared by a new auditor show a $7 million decline in the unreserved general fund balance to a low 1.9% of total spending. City officials report that the draw on reserves reflects the general fund advance of funds to the city's self-insurance fund in the amount of $4 million and $3 million to the education fund in anticipation of state reimbursement for food service costs. While the self-insurance fund maintains an accumulative deficit of $16.1 million including $8.8 million in reserves for outstanding litigation, the city expects to appropriate $4 million annually to remedy the accumulated deficit and return funds advanced by the general fund. The city also has plans to balance the fund on a go forward basis and success in this area, in addition to favorable labor negotiations, are important to the city's overall financial flexibility and maintenance of the current rating level.
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. In response to several budgeted revenue shortfalls and above budgeted costs for public safety overtime and worker's compensation claims, the city eliminated 82 positions. On a positive note, revenues from property tax receipts are above budget year to date and expenditures for medical benefits are under budget and have achieved some wage savings as it is undergoing contract negotiations with many of the city's bargaining units. The city anticipates that a new budget strategy should yield additional savings of $3 million as the city's agencies and departments work to achieve expense reductions throughout areas of the city. The city is in the process of preparing its budget for 2012 and expects an increase of less than 1%.
The city's debt levels are above-average with net overall debt per capita at $4,365 and debt to full value at 5.8%. 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 continues to make 100% of the annual required contributions (ARC) to its two pension systems but poor investment returns have lowered asset values to low 50% funded levels. The unfunded liabilities as of June 30, 2010 for the city employee retirement fund were $203 million and $266.8 million for the police and fire fund. The city approved the creation of an OPEB trust with nominal funding in fiscal 2010 and 2011. The city's fiscal 2010 OPEB pay-go contribution was 48.2% of the $42.1 million ARC. The unfunded actuarially accrued liability (UAAL) is high at $414 million.
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 Oct. 8, 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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