NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the Town of Groton, Connecticut's (the town) following general obligation (GO) bonds:
--$8,945,000 GO bonds, issue of 2014, lot A;
--$375,000 GO bonds, issue of 2014, lot B (Taxable).
The Lot A bond proceeds are being used to finance various public improvement projects. The Lot B proceeds are being issued to finance a senior center project in the town. The bonds are scheduled for a competitive sale on April 2.
In addition, Fitch affirms the town's following ratings at 'AA':
--$775,000 GO bonds, series 2009;
--$150,000 GO bonds, series 2007, lot A;
--$150,000 GO sewer bonds, series 2007, lot B.
The Rating Outlook is Stable.
The bonds are backed by the town's full faith and credit and unlimited taxing authority.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: The town's long standing strong management practices are the key credit strength and a mitigant to its concentrated economy. The town consistently reports a sound financial cushion supported by independent revenue raising flexibility, conservative budgeting and a demonstrated ability to adjust spending in response to revenue declines.
LOW DEBT; MANAGEABLE RETIREMENT COSTS: Fitch expects Groton's debt ratios to remain low as future debt plans are moderate. The town prudently funds 100% of actuarially required contributions (ARC) for its pensions and recently for its other post-employment benefits (OPEB). Overall carrying costs for long-term liabilities are low despite rapid amortization of debt.
DECLINING EMPLOYMENT; HIGH CONCENTRATION:
The town's employment base, driven by the presence of the U.S. Navy, Electric Boat, and Pfizer, remains in decline and there is a very high level of concentration from both an employment and tax base standpoint.
Management's ability to manage its finances and maintain adequate reserves in lieu of pending downsizing of major taxpayers and employers, due to the high level of concentration, is a key rating factor. The Stable Outlook reflects Fitch's expectation for continued prudent budgetary management supported by the town's sound reserve levels and ability to raise revenues.
The Town of Groton is located in southeastern Connecticut with the 2012 population of 39,896 remaining relatively flat since the 2000 census. The town's location on local waterways serves as an important driver of economic activity. The Thames River is adjacent to the town on the west, the Mystic River to the east, and the Long Island Sound is located directly to the south.
HIGHLY CONCENTRATED ECONOMIC BASE
The town's economy is heavily influenced by the sizable presence of the Naval Submarine Base New London (the base), General Dynamics' Electric Boat Corporation, and Pfizer. Collectively these firms employ 19,770 in the town (as of June 30, 2013). Pfizer and Electric Boat account for a high 13% and 6.5% of the town's $5.6 billion tax base, respectively.
Each of these entities has a long-standing presence in the town and has invested significantly in plant infrastructure. In January 2014, Electric Boat announced $100 million in future investments to their facility in Groton. Pfizer's Groton office remains the firm's largest research and development center despite plans to demolish a large office building later this year.
The town estimates the resultant annual revenue loss at $1.8 million (1.5% of current budget) beginning in fiscal 2016. The town has prudently taken steps to prepare for this future revenue loss by proposing in its upcoming fiscal 2015 budget to strengthen their fund balance reserve policy and set aside $3.6 million of additional reserves for the potential decline in future tax revenues for fiscal 2016 and fiscal 2017. Fitch believes these efforts, if ultimately approved, along with the potential for new tax base growth associated with planned upgrades to Electric Boat's Groton Shipyard, will help mitigate the expected loss in tax revenues over the intermediate term.
The employment picture for both the town and New London County remain pressured. The town has experienced consecutive years of reductions to both its labor force and employment base since 2007, with average annual declines of 1.2% and 1.7% respectively; driving unemployment rates down. The town's December 2013 unemployment rate of 8% was above that of the state's 6.8% and nation's 7.4%, but down from 8.5% a year prior. Median household income and per capita income levels are 114% of national levels and 87% and 85% of state levels, respectively.
PRUDENT MANAGEMENT; CONSISTENT FINANCIAL RESULTS
The town's history of sound financial performance and revenue raising flexibility softens the overall credit risk associated with its concentrated economic base. General fund operating results consistently produce an adequate cushion with unreserved or unrestricted fund balance maintained between 8% and 12% of spending the last five years.
The town ended fiscal 2013 with an operating surplus (after transfers) of $1.9 million (or 1.3% of spending), mostly due to tax revenues coming in stronger than budget and increases in federal aid. Property taxes are the largest revenue source at 64% of general fund revenues. Surplus results improved the town's unrestricted fund balance to $14.6 million or a sound 11.4% of spending, helping to provide a satisfactory cushion against unforeseen spending needs or emergencies.
The town regularly includes as revenue a portion of unassigned fund balance above its 7.75% of spending floor, pursuant to town policy. Importantly, conservative budgeting and active intra-year budget adjustments typically result in budget surpluses.
The fiscal 2014 budget was balanced with an appropriation of $2 million of fund balance for tax relief purposes. Reductions in the contribution to the capital reserve fund and reduced debt service payments contributed to the adopted $120 million fiscal 2014 budget, down 0.8% from the fiscal 2013 budget. The town prudently started including OPEB funding at or above the ARC in fiscal 2012. The fiscal 2014 budget includes a tax rate increase of 2.5% to 20.72 mills to offset the 2.1% decline in taxable values.
Preliminary results for fiscal 2014, as provided by management, indicate an operating surplus of $1.8 million without the use of appropriated fund balance. The town is experiencing positive budget variances on the revenue side with higher than anticipated federal and state intergovernmental revenues of $0.9 million and $1.6 million respectively. Expenditures are also trending below budget.
The fiscal 2015 budget includes a proposed increase to the unassigned fund balance policy floor to 8% of general fund expenditures from 7.75%. The town maintains additional flexibility via its policy of annually funding a capital reserve; totaling $2.1 million as of June 30, 2013 (1.6% of spending). In the event of fiscal pressure this balance could be moved back to the general fund to help cover operating expenses. Additionally, this level of funding could be adjusted as necessary to alleviate budget pressure.
Fitch believes the town also maintains a good deal of revenue raising flexibility that positions it to offset tax base declines or other unforeseen operating challenges. The town's tax rate is regionally competitive and there are no legal limitations on tax increases.
LOW LONG TERM LIABILITY BURDEN
The town's overall debt burden is low at $1,696 per capita and 1.2% of market value. The 2014-2019 capital improvement program totals $87 million and calls for an additional $15 million in debt financing spread out over the remaining four years of the plan. This additional debt should not have a material effect on the town's modest debt profile.
All town employees, excluding teachers, participate in the town's single employer defined benefit plan. The plan's ARC represents a low 2% of total fiscal 2013 governmental fund spending. The plan is well-funded at 80% and assumes a discount rate of 8%. Using Fitch's 7% discount rate assumption the estimated ratio declines to a still satisfactory 72%. The unfunded actuarial accrued liability of $23 million is manageable at less than 1% of market value. Board of Education teachers participate in the State Teachers' Retirement System, a cost-sharing pension plan, for which the state is solely responsible for all contributions.
OPEB liabilities are manageable with the total unfunded liability less than 1% of market value. Carrying costs for debt service, pension, and OPEB ARC totaled a low 8.7% of total governmental fund spending in 2013 despite rapid principal amortization of 74% within 10 years.
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, Underwriter, Bond Counsel, Underwriter Counsel, Trustee.
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