NEW YORK--(BUSINESS WIRE)--Fitch Ratings rates the following bonds for the city of Summit, NJ (the city):
--$7,400,000 general bonds, series 2014 'AAA';
--$2,200,000 parking bonds, series 2014 'AAA'.
The bonds are scheduled to sell competitively on Jan. 7, 2014. Proceeds will be used to support various city and parking utility improvements.
In addition, Fitch affirms the following ratings on the city's outstanding bonds:
--$51.6 million unlimited tax GO, assessment, sewer and school bonds, various series at 'AAA'.
The Rating Outlook is Stable.
The bonds are secured by the city's full faith and credit and ad valorem tax pledge, without limitation as to rate or amount. Bonds issued for school purposes are additionally secured by the New Jersey School Bond Reserve Act.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: Financial performance and reserves remain strong at close to 20% of budget. Management has prudently maintained budgetary balance within the statutory 2% annual property tax levy cap.
STRONG LOCAL ECONOMY: The city is advantageously located near numerous employment opportunities both within the city and within commutable distance to the greater New York City marketplace.
STABLE TAX BASE; POTENTIAL PRESSURE: New development and the high desirability of the city's residential and commercial properties have resulted in a relatively stable tax base with minimal declines during the recession. The announced departure of Merck & Co. (Merck), the city's largest taxpayer, could pressure the tax base if the successful sale of the property is delayed.
ABOVE AVERAGE ECONOMIC INDICATORS: City wealth and income levels are significantly above state and national averages, reflective of residents' access to multiple employment markets.
MODERATE DEBT: Debt levels are moderate on a per capita basis and amortization is rapid. Capital needs are manageable and debt ratios are not expected to change materially over time. Annual carrying costs for city and school debt and pensions are moderately-high as a percentage of budget.
FUNDAMENTAL CHANGES NOT EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and maintenance of healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
Summit is located 16 miles west of New York City in Union County, NJ. It is proximate to several interstate highways and offers convenient transit services. Summit has a 2012 population of 21,828, up 3.3% since 2000.
DIVERSE ECONOMY WITH ACCESS TO EMPLOYMENT MARKETS
The city's downtown is a regional retail and office center and residents benefit from proximity and easy access to numerous employment opportunities throughout the metropolitan NY region. Local employment is anchored by Overlook Medical Center with over 3,000 employees and Merck (1,500) and Wells Fargo (500).
DEPARTURE OF LARGEST TAXPAYER PLANNED
Merck announced in October that it plans to close its Summit campus and move its operations to a different facility within New Jersey. The move is part of an effort to consolidate its New Jersey operations. The move is expected to begin in 2014 and be completed by 2015. Merck had originally announced last year its intention to move its headquarters to its Summit campus, but these plans were changed.
According to city management, Merck will continue to pay its property taxes through 2014. Merck's assessed value represents 7.2% of the city's tax base and its annual property taxes equate to approximately $9 million. However, only 21% or $1.9 million of Merck's property taxes are attributable to city general operations, equaling under 5% of current fund revenues.
Merck is in the process of trying to sell the property to a similar entity and has suggested that the sale process could take at least nine months. The risk of a tax appeal by Merck exists beginning in 2015 if Merck is successful in vacating the property by that time and a sale has not materialized. Management has indicated to Fitch its plans to mitigate this risk, if necessary. As such, Fitch believes that the short term risk of a successful appeal would not materially affect financial operations. The attractiveness of the property and the city's overall positive demographic profile and location support the prospect for a successful sale in a reasonable timeframe.
ABOVE AVERAGE DEMOGRAPHIC PROFILE
Given the city's highly educated workforce, income levels are above average. The city's 2011 per capita income level equaled 205% and 261% of the state and national averages, respectively. Fitch expects city economic indicators to remain above average.
Taxable assessed values have remained relatively stable the last five years, with full market value sizable at $6.7 billion or $309,000 per capita. Building permit activity continues to increase, with 2013 expected to exceed 2012 as a result of additional office and residential projects. Downtown commercial occupancy rates remain strong at over 97%. Leading taxpayers are diverse after Merck.
FINACIAL PERFORMANCE REMAINS SOUND
Fitch views financial management as a credit positive. The city has maintained budgetary balance and strong reserves through use of conservative budgeting practices and forward planning. Historically, unrestricted current fund reserves averaged between $8 million-$9 million or 20%-24% of the city's general operating budget.
The city ended fiscal 2012 with a small increase in fund balance of $220,000 as property tax collections were strong and management budgeted less surplus revenues. The city received $425,000 in aid from the state as a result of Hurricane Irene and an October snowstorm which helped reimburse the current fund for prior year expenditures. The current unrestricted fund balance was $8.1 million or a sound 19.7% of spending for fiscal 2012.
Management has indicated that revenue projections are as expected for fiscal 2013 as tax collection rates remain strong. The city received $700,000 in aid from the state as a result of Hurricane Sandy which will help maintain reserves at or slightly above the $8 million level.
For fiscal 2014, the city is expecting a slight increase in pension costs but lower debt service costs. Additionally, employees are statutorily required to begin contributing more towards healthcare costs in 2014. New Jersey municipalities are subject to a 2% tax levy cap, although debt service, pension and healthcare costs are exempt. The city has been successful in managing within this tax cap. The final budget will not be adopted until April 2014 as is required by statute for New Jersey municipalities.
MODERATE DEBT PROFILE AND GROWING PENSION COSTS
Debt levels are moderate on an overall basis, with debt per capita at $5,751 and 1.8% of market value. City carrying charges for debt service (including school debt), pensions and other post-employment benefits (OPEB) is moderately high at 22.8% of the 2012 general operating budget. Offsetting the above average carrying costs is the rapid debt amortization rate of city, school and self-supporting debt at 82% in 10 years and manageable capital needs going forward.
City pension costs are based on participation in the state operated retirement programs which currently are poorly funded in Fitch's opinion. City OPEB liabilities are limited to very small annual stipends. The city's required pension contributions were $3 million in fiscal 2012 and $3.1 million in fiscal 2013 and are expected to increase by 6.4% for fiscal 2014.
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, and 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
U.S. Local Government Tax-Supported Rating Criteria