NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'BBB' rating on approximately $18 million of Utica, NY's (the city) outstanding unlimited tax general obligation (ULTGO) bonds.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The city has pledged its full faith and credit and unlimited taxing power for debt service on outstanding GO bonds issued prior to 2011. A 2011 state statute limits property tax levy increases to the lesser of 2% or an inflation factor (state property tax levy cap law). This limit can be overridden annually by a 60% vote of the city's Common Council. No exemption is made under the tax cap law for debt service on outstanding GO debt; however, the constitutionality of this provision has not been tested.
KEY RATING DRIVERS
OUTLOOK CONSIDERATIONS: Fitch revises its Outlook to Negative given possible budgetary downside from the city's currently open labor contracts, a high level of external borrowing, the city's small fiscal margin and reliance on revenues outside their control. Further, there is concern about the city's very late audit, which Fitch believes is evidence of a lack of efficient managerial collaboration.
CHALLENGED FINANCIAL PROFILE: The city's current financial position is challenged with marginal reserves and scant flexibility for error and unforeseen events in execution of its budgets. Recent increases in revenues and cost-cutting measures have resulted in the city now projecting its first operating surplus in four years for fiscal 2013.
SLIM LIQUIDITY: The city's cash position is tight, which was managed with cash-flow borrowing for the previous two fiscal years. Borrowing is projected to remain stable for fiscal 2014 and Fitch expresses some concern about market access given the below-average rating.
WEAK SOCIO-ECONOMIC INDICATORS: The city's socioeconomic indicators are weak, with below-average wealth and income, elevated unemployment, and low per capita market value.
MIXED LONG-TERM LIABILITY PROFILE: Fitch notes as a credit positive the city's manageable carrying costs for debt service, pension and retiree healthcare and rapid amortization of direct debt. Overall debt levels are moderately high and the city participates in the state's well-funded pension plan, costs for which may pressure future budgets given some payment deferrals.
RATING SENSITIVITIES
FINANCIAL PERFORMANCE: The rating is sensitive to management's ability to respond to negative financial developments given the city's lack of reserves and limited balancing options.
LATE REPORTING: Fitch believes the delay in the release of the March 30, 2012 audit is evidence of Fitch's broader concern that a lack of managerial collaboration is having a negative impact on financial performance and transparency. The rating is sensitive to further substantial delays in financial reporting and/or audited results that show a negative variance from estimates.
CREDIT PROFILE
Utica is the county seat of Oneida County (rated 'A+', Outlook Stable by Fitch) and is located in central upstate New York in the area commonly known as the Mohawk Valley. The city's chronic population out-migration trend appears to have moderated and shows early signs of reversal, with marginal population growth of 2.6% between 2000 and 2010.
CHALLENGED FINANCIAL FLEXIBLITY, DEPLETED RESERVES
The city experienced largely positive operations through fiscal 2009 after fiscal trouble in the early 1990s. Since 2010, this operating trend has reversed with recessionary revenue pressure. The city's general fund operating deficits after transfers over the past two years resulted in a weak unrestricted balance of 3.2% of general fund spending at the end of fiscal 2011, deteriorating from an adequate 6.9% unreserved balance in fiscal 2009.
The city's 2012 audited financial statements (March 31 fiscal year end) are over six months late due to a shift within the city in responsibility for the audit and a change in audit firm. Management reports that the audit will show a $2 million draw on fund balance, worse than projected in April 2012, with a very weak $700,000 in fund balance (1% of spending).
Fiscal 2012 estimated performance is slightly worse that the state auditor's office projected in either of its reviews of the city's finances over the past year, which were performed at the request of the city's mayor. The city has not provided a draft audit and negative rating action is likely if audited results show a negative variance from expectations.
Management projects a moderate addition to fund balance of $700,000 for 2013, which Fitch believes is conservative given substantial expense reductions and a tax increase. This projection does not rely on operating transfers from the city's water capital trust fund which the city has historically relied on for its general fund operations. This positive financial margin is a result of significant spending changes, including a 7% reduction in general fund staffing as well as a 10% increase in the city's property tax and the city's participation in the state's pension deferral program for a portion of payments. Importantly, management reports more conservative revenue budgeting, with sales tax coming in 2% over budget with some additional accruals pending.
FISCAL CHALLENGES CONTINUE
Fitch believes that the city's financial operations in fiscal 2014 and beyond will remain challenged as the city struggles to achieve ongoing budgetary balance. Notably, the city is unable to meet its charter-mandated fund balance policy of 3% for a second year. Additionally, Fitch believes that restoration of budget balance in out-years will continue to be challenged by the state's property tax levy cap, which may hamper the city's willingness to increase its tax levy, especially in election years, further pressuring already stressed operations.
The city's 2014 budget increases spending by a manageable 0.5%, raises the property tax levy by 2%, and assumes a 0.5% increase in sales tax over 2013 actual, which Fitch believes is realistic. However, the city's contract with the Patrolmen's Benefit Association expired in 2011 and may go to binding arbitration. Fitch is concerned about the city's exposure to potential expenditure increases associated with retroactive and new payments, as the fiscal 2014 budget does not assume any increases.
Positively, the 2014 budget does not include land sales or speculative revenue sources as have been included in most recent years' budgets. Further, management projects a reduction in general fund dependence on transfers from its water capital trust fund, the balance of which has almost been depleted from operating transfers to the general fund since 2006. The city remains reliant on revenue outside its control with state and federal funding representing 31% of fiscal 2011 revenues.
CONTINUED LIQUIDITY PRESSURE
In fiscal 2012, the city's tight cash position required short-term borrowing for the first time since fiscal 2000, with the city issuing $8 million in state revenue anticipation notes (a moderately high 13% of general fund revenues) through a local bank. Liquidity concerns from Utica City School District (the district) in early calendar 2012 resulted in the city agreeing to accelerate the frequency of property tax remittances to the district, which partially drives the need for the city's higher level of cash flow borrowing. The city guarantees 100% of city school district property taxes and with the continued practice of advancing funding to the district, is exposed to school district liquidity issues.
In 2013, the city increased its annual short-term borrowing to $12 million (a high 19% of revenues) and projects the same cash-flow needs for 2014 which may prove conservative given the aforementioned structural changes to the budget.
Fitch remains concerned about the city's dependence on a high level of short-term borrowing and further declines in the city's overall financial flexibility. This dependence on the market for cash-flow solutions introduces market-access risk to the city's financial profile given the city's below-average credit ratings.
WEAK ECONOMIC BASE
The city's socioeconomic indicators are weak, most notably reflected in the city's individual poverty rate which is twice the national average. Consistent with the upstate New York region, income and wealth levels are low, with median household income at 56% and 61% of state and national averages, respectively. The real estate market did not experience a boom or bust through the recent economic cycle, and market value has increased 29% since 2008. However, market value per capita is weak at $24,000 and assessed valuation has incrementally declined each year since 2008, down an aggregate 2%. Fitch believes that the city's middle-term economic and financial prospects remain constrained.
The services sector remains a major contributor to the local labor market, with entities such as Metropolitan Insurance, Bank of America, and Mohawk Valley Network, a major medical facility, as well as other health care and social service providers operating in and near the city. The regional economy has seen some improvement with the successful gaming operation at the Oneida Indian Nation, the area's largest employer, as well as the redevelopment of Griffiss Business and Technology Park (formerly Griffiss Air Force Base) in nearby Rome. Bass Pro Shops is opening a retail location within the city which may provide some additional sales tax revenue.
The city unemployment rate was an elevated 9.7% in February 2013, even with prior year and above state (8.8%) and national (8.1%) averages. The city has seen a year-on-year contraction in both its employment and labor force.
FIXED COSTS MAY CHALLENGE FINANCIAL FLEXIBILITY
The city's debt profile is mixed, with low overall net debt per capita of $1,553, but an elevated 6.4% of market value, underlining the city's weak tax base. Amortization is rapid, with 80% retired in 10 years. Debt service is a manageable portion of the city's spending at 10.3% of the 2013 general fund budget. Carrying costs of debt, pension, and OPEB are a currently manageable 13.7% of 2011 governmental (net of capital) fund spending, but Fitch expects these costs to rise with deferred pension payments and an underfunded OPEB annual required contribution. The city does not currently prepare a multi-year capital plan and is contemplating approximately $6 million in bond anticipation notes this year for various public improvement and sewer projects, almost all of which is anticipated to self-support. Future debt plans are expected to average a manageable $2 million-$3 million annually.
As of March 31, 2011, the city's OPEB liability totaled $57.4 million or a high 3.7% of market value. The city currently funds its liability on a pay-as-you-go basis, paying $2.6 million (4% of spending) in fiscal 2011, below the $5.8 million ARC.
The city participates in state-run defined benefit pension plans which are well-funded under the aggregate cost valuation method. The 2013 budget pension payment represents 7.8% of general fund spending. Nevertheless, the city plans to continue its participation in the state pension payment cost stabilization plan. The city most recently deferred approximately 24% of its required payment for 2013. Fitch believes pension deferrals provide some near-term budget relief but make future year budgeting more challenging.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789602
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