NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its rating on $18,115,000 of Utica, NY's (the city) outstanding unlimited tax general obligation (ULTGO) bonds at 'BBB'.
The Rating Outlook remains Negative.
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
NEGATIVE OUTLOOK MAINTAINED: Fitch's maintenance of the Negative Outlook reflects ongoing concerns about the city's challenging financial profile as well as concerns around timely financial reporting. Fitch believes that the city's current financial position will remain challenged despite positive projections for 2013 and 2014 with marginal reserves and scant flexibility for error and unforeseen events in execution of its budgets. Also, the audit for fiscal year end March 31, 2013 has yet to be finalized, which Fitch believes is evidence of a lack of efficient managerial collaboration.
SLIM LIQUIDITY: The city's cash position is tight, which was managed with cash-flow borrowing for the previous three fiscal years. Borrowing is projected to remain stable for fiscal 2015 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. Restoration of a comfortable financial cushion would stabilize the rating.
LATE REPORTING: Fitch expects that subsequent audits will be released in a timelier manner. A lower rating level may be appropriate and Fitch's ability to maintain a rating may be compromised should additional substantial delays in financial reporting occur.
CREDIT PROFILE
Utica is the county seat of Oneida County ('A+'/Outlook Stable) 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 an estimated population of 61,992 in 2011.
CHALLENGED FINANCIAL FLEXIBILITY AND 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 three years resulted in a very weak $47,000 unrestricted fund balance (0.1% of general fund spending) at the end of fiscal 2012, deteriorating from an adequate $4.6 million or 6.9% unreserved balance in fiscal 2009. Negative results were driven by aggressive revenue budgeting and departmental overages.
IMPROVED FINANCIAL PERFORMANCE BUT CHALLENGES REMAIN
The city's draft audit for fiscal 2013 shows a moderate addition to fund balance of $931,000 (1.5% of spending and transfers). The city's improved financial performance reflects a 7% reduction in general fund staffing as well as a 10% increase in the city's property tax. Property taxes are the leading source of revenue for the general fund, accounting for roughly 35% of the budget. Additionally, the city continues to participate in the state's pension cost deferral program for a portion of payments, and sales tax revenues are an estimated 1.3% over budget.
The city projects further positive performance of around $1 million in fiscal 2014, driven by changes in health care plans and favorable variance to budget in sales tax, up 0.9%. The city's estimate incorporates $2.1 million of unbudgeted one-time back pay related to the settled police union contract. These projections, if confirmed in the city's 2014 audit, will bring the city closer to its charter-mandated fund balance policy of 3%.
The city's 2015 budget increases spending by a manageable 2.3% and includes another notable increase in the property tax levy by 8.73%. A 3% increase in sales tax over 2014 actual may be somewhat aggressive despite additional retailers opening in the city.
However, some one-time expenses have not been budgeted but which may be covered by the city's budget contingency. The city remains reliant on revenue outside its control with state and federal funding representing 31% of fiscal 2012 revenues.
CONTINUED LATE AUDITS
The city's 2013 audited financial statements (March 31 fiscal year end) are over three months late from the city's ongoing reporting requirement (ie, 270 days from close of fiscal year). The 2012 audit was similarly late. A new auditor was involved in the 2012 and 2013 audit. Fitch expects that subsequent audits will be released consistent with the city's continuing disclosure reporting requirement.
LIQUIDITY DEPENDENT ON BORROWING
The city's high dependence on liquidity borrowing remains a credit risk, despite decreases in annual cash flow borrowing. In 2013 the city privately placed two short-term cash flow notes totaling $12 million or a high 19% of revenues. The city's cash flow borrowing declined to $6.9 million, or a moderate 10.9% of revenues in 2014 as a result of the city's change in frequency of property tax remittances to Utica City School District. The city has authorized similar cash-flow borrowing for 2015, at $7.2 million (10.8%), but projects to only borrow $5.5 million (8.2%). The city's dependence on the market for cash-flow solutions introduces market-access risk to its 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 24.8% since 2008. However, market value per capita is weak at $23,000 and assessed valuation has incrementally declined each year since 2008, down an aggregate 1.7% and down marginally (0.1%) for 2015. Fitch believes that the city's middle-term economic and financial prospects remain constrained. Positively, the city has seen some increases in its current real property tax collections, up to 96% from 94% in 2012.
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 has opened a retail location within the city which the city believes will provide additional sales tax revenue. Additionally, the city has seen some investment in its downtown and sizable investments in nearby Marcy's State University of New York nanotechnology center.
The city unemployment rate was an elevated 7% in December 2013, notably down from prior year (9.5%); and above state (6.6%) and national (6.5%) averages. Negatively, the sharp dip in the unemployment rate was driven by a 1.5% labor force contraction.
FIXED COSTS MAY CHALLENGE FINANCIAL FLEXIBILITY
The city's debt profile is mixed, with low overall net debt per capita of $1,516, but an elevated 6.5% of market value reflective of the city's weak tax base. Amortization is rapid, with 81% of outstanding debt retired in 10 years. Carrying costs related to debt, pension, and other post-employment benefits (OPEB) are a currently manageable 19.4% of 2012 governmental fund spending. The city's participation in the state pension payment cost stabilization plan somewhat tempers its manageable carrying costs. The city most recently deferred approximately 20% of its required payment for 2014 and expects to defer the same amount in 2015.
Fitch expects these costs to rise though remain manageable with deferred pension payments. The city does not currently prepare a multi-year capital plan and continues to contemplate low annual borrowing for maintenance needs.
As of April 1, 2012, the city's OPEB liability totaled $56.4 million or a high 3.9% of market value. The city currently funds its liability on a pay-as-you-go basis, paying $3.5 million (4% of spending) in fiscal 2012, below the $6.3 million ARC. The city participates in state-run defined benefit pension plans which are well-funded under the aggregate cost valuation method.
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, and 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=827435
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