Fitch Affirms Dover, Delaware's Refunding GOs at 'AA+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following ratings on the City of Dover, Delaware (the city):

--$990,000 general obligation (GO) refunding bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city for the payment of which the city's full faith and credit and unlimited taxing power are pledged.

KEY RATING DRIVERS

STABLE ECONOMIC BASE: As the capital of the State of Delaware, the local economy is stable and anchored by government employment. The economy is complemented by the presence of the Dover Air Force Base.

STRONG FINANCIAL RESERVES: General fund reserve levels are strong despite substantial paygo financing of capital projects.

RELIANCE ON ENTERPRISE OPERATIONS: The city general government operations are largely supported by transfers from the utility funds, accounting for over 30% of revenues.

LOW DEBT BURDEN: The city's overall debt burden is very low with manageable future debt needs.

RATING SENSITIVITIES

FINANCIAL STABILITY: Fitch considers the city's ability to balance its general fund budget (without a significant use of fund balance) through the adoption of revenue enhancements and/or expenditure cuts as vital to the maintenance of the current rating.

CREDIT PROFILE

Dover is located in Kent County in central Delaware (rated 'AAA'; Stable Outlook by Fitch). The city had an estimated 2012 population of 37,089.

DIVERSE AND STABLE ECONOMIC BASE

As the capital of the State of Delaware and county seat for Kent County, Dover's employment base is heavily influenced by the stable government sector. The city is also home to Dover Air Force Base (Dover AFB), which employs approximately 6,400 military and civilian personnel. Dover AFB is the largest and busiest air freight terminal in the Department of Defense and serves as a focal point for military cargo movement to Europe and the Middle East. Delaware State University and Bayhealth Medical Center also provide stable sources of employment.

The city's favorable tax environment and proximity to major east coast markets also make it a center of commerce and employment for central Delaware. The city is in the process of developing infrastructure for the Garrison Oak Technology Park (the park). Two tenants have already agreed to move in to the park and will begin to show on the city's tax roll in fiscal 2016. Dover Downs Hotel and Casino is the city's largest taxpayer and second largest private employer (1,450 employees). Recent press reports highlight sharp declines in profitability related to increased competition, and management has speculated that layoffs are a possibility.

Wealth levels trail the nation, with per capita money income and median household income representing 81% and 91% of the national average.

FINANCES SUPPORTED BY TRANSFERS FROM UTILITIES

Fiscal 2013 ended with a general fund operating surplus after transfers of $3.3 million (9.37% of spending). General fund operations included $5.1 million of capital project spending. During fiscal 2013 the city issued $2.6 million in privately placed bonds to repay the general fund for capital spending incurred during the prior year. The unrestricted general fund balance increased to $7.8 million (22% of spending). Reserve levels remain well above the city's financial policy minimum of 8% in unassigned fund balance plus 2% for contingency.

Transfers in from the electric fund (revenue bonds rated 'AA-' by Fitch) and water/wastewater fund (revenue bonds rated 'AA') help support operations in the general fund. Utility transfers in totaled $10.5 million in fiscal 2013 (27% of general fund revenues). The city revised its transfer practices in fiscal 2013 stating the total budgeted utility transfer may not exceed 25% of budgeted general fund revenues.

Transfers from the electric fund can be no greater than $8 million, and transfers from the water/wastewater fund can be no greater than $500,000. Property taxes are the largest funding source for the general fund at 31% of budgeted revenues. The property tax rate or levy is not subject to a cap or limit, providing the city with revenue raising capacity to cover future expenditure growth if necessary.

The fiscal 2014 budget reflects fairly flat revenues and expenses with utility transfers equal to the newly established limit (a total of $8.5 million on a budget of $36 million). The budget also appropriates a modest fund balance appropriation of $555,500. Preliminary indications for year-to-date fiscal 2014 show revenues coming in roughly $202,000 under budget and expenditures also slightly under budget. This is due to employee turnover and the delayed filling of vacant positions.

LOW DEBT, LIMITED CAPITAL NEEDS

The city's debt burden is very low reflecting its regular use of pay-go capital spending. Debt service as a percent of governmental spending totaled a very low 1% in fiscal 2013. The city expects that all of their outstanding tax-supported debt will be fully repaid by 2019. The 2014-2018 capital improvement plan (CIP) includes $3.4 million for general fund projects.

PENSION FUNDING WEAK BUT LIABILITY MODERATE

The city participates in the well-funded, state-operated Delaware County and Municipal Police Pension Plan. In addition to the state plan, the city also maintains two closed defined benefit plans, the City of Dover Police Pension Plan, and the City of Dover General Employee Pension Plan.

Both of these plans are poorly funded at 54% and 40.3% respectively. The city has failed to meet the annual required contribution for the police plan for the past four years which Fitch views as a concern. However, management intends to fully fund the actuarial required contribution (ARC) in fiscal 2014. The city has implemented a policy to use all positive budget balance variances to reduce the unfunded liabilities of the pension plans. Despite the weak funded position of the plan, as of July 1, 2012 the total unfunded actuarial accrued liability (UAAL) remains a manageable $42 million, or under 1% of market value.

Other post-employment benefits (OPEB) liabilities are moderate, with an UAAL of $60 million or 1.3% of market value. The city established an OPEB trust in 2009 and enacted a 10-year phase in plan of the ARC to help manage the growth in their unfunded liability. Carrying costs for pension and OPEB approximate a somewhat high 18% of governmental spending, offset by the city's very low annual debt charges.

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.

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=822124

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Contacts

Fitch Ratings
Primary Analyst
Andrew Hoffman, +1-212-908-0527
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan, +1-212-908-0675
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Andrew Hoffman, +1-212-908-0527
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Patricia McGuigan, +1-212-908-0675
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com