NEW YORK--(BUSINESS WIRE)--(This is a correction of a release originally issued May 1, 2014. It provides revised information regarding a reduction in proceeds of $1.1 million as the issuance authorization is still in the petition period. The updated release includes changes to sale amounts, deletes a sentence on the use of the $1.1 million proceeds, and now includes updated information regarding the city's bond issuance and sales timing.)
Fitch Ratings assigns the following ratings to the city of New London, CT's bond anticipation notes (BANs) and general obligation (GO) bonds:
--$12,625,000 GO BANs, Lot A, 'F1+';
--$1,500,000 GO taxable BANs, Lot B, 'F1+';
--$4,560,000 GO bonds, Lot A; 'A+';
--$5,700,000 GO taxable bonds, Lot B 'A+'.
The BANs and bonds are scheduled to sell competitively on May 13. Proceeds will be used to fund outstanding BANs maturing on May 22, 2014 as well as to fund various city and school capital projects.
In addition, Fitch affirms the following ratings on the city's outstanding GO bonds and BANs listed below:
--$8.9 million GO bonds, issue of 2012, Lot C, at 'A+';
--$4.56 million, GO bonds, issue of 2012, at 'A+';
--14 million, GO bonds, series 2009, at 'A+';
--$11.635 million GO BANs, Lot A, at 'F1+';
--$3.265 million taxable GO BANs, Lot B, at 'F1+'.
The Rating Outlook is Stable.
The bonds and notes are a full faith and credit obligation of the city backed by its unlimited taxing power.
KEY RATING DRIVERS
NARROW RESERVES LIMITS FLEXIBILITY: Reserve levels are currently slim and while the city has a plan in place to rebuild reserves to more robust levels, management will be challenged to do so as fixed costs rise and the economic recovery lags. However, Fitch expects the city to continue to appropriate increases to reserves.
MANAGEABLE LONG-TERM LIABILITIES: The city's overall debt levels are moderate and should remain affordable given the above-average principal amortization and the city's modest debt issuance plans. Pensions are well funded and total pension, debt and OPEB carrying costs are not burdensome.
WEAK DEMOGRAPHICS/DIVERSE ECONOMY: The unemployment rate remains elevated and economic indicators are below average, evidenced by weak income levels. However, the presence of health care and higher education institutions lend stability and diversity to the economy. Defense-related employment remains important to the local economy and has not been materially affected by federal budget cuts.
FUTURE MARKET ACCESS: The 'F1+' short term rating on the series 2014 BANs reflects the city's overall credit characteristics, and unlimited taxing powers.
MAINTENANCE OF ADEQUATE LIQUIDITY/RESERVES: The city is focused on rebuilding its reserve and liquidity balances and Fitch expects the city to comply with its ordinance requiring annual contributions. Any reversal in this plan could result in negative rating pressure.
New London is located approximately an hour from Providence, RI and 120 miles northeast of New York City. Its population in 2012 was 27,707, up 8% from 2000.
STRUCTURAL IMBALANCE CAUSED DECLINE IN RESERVES
Large general fund operating deficits in fiscal years 2011 and 2012 significantly reduced the city's financial flexibility. The 2012 deficit was due to optimistic revenue assumptions particularly in property tax collections and state aid and overspending by fire and public works departments. The fiscal 2012 unrestricted general fund balance of $1.3 million was a low 1.4% of spending.
During fiscal 2012, under the new, strong-mayor form of government, management took remedial action to cut spending, including implementation of layoffs. As a result of these cuts and a 5.1% tax increase ($2.3 million in additional revenues), the city was able to produce a modest surplus for fiscal 2013, increasing reserves to $1.5 million or a still low 1.7% of spending.
City council approved a 3.4% tax increase as part of its fiscal 2014 budget. The budget failed to be approved on the first submission and was revised and ultimately approved by the city's council with a 2.9% tax rate increase. The city is projecting it is on target with budgeted operations for fiscal 2014.
The city's revenues consist primarily of property taxes and state aid for education. State aid revenues as a percentage of the budget are declining but still represent 41% of total general fund revenues, leaving the city exposed to state aid volatility. As a result rebuilding reserves are key to maintaining credit quality.
The mayor's fiscal 2015 budget includes a $500,000 appropriation for reserves and the city council has approved the reserve appropriation. The city has committed to further building of reserves: a recently adopted fund balance replacement plan ordinance requires the city to annually budget at least $250,000 towards restoration of fund balance. The ordinance further requires all proceeds from asset sales to be dedicated to build reserves. The city holds a number of properties it is actively seeking to sell which could produce revenues of about $1 million over the near term. Given their current low level, Fitch views favorably the city's formal policy for rebuilding its reserves.
DIVERSIFIED ECONOMY WITH SIGNS OF DEVELOPMENT
Over the last 20 years the local economy has diversified away from a heavy reliance on defense-related employment with expansion in the service-related sectors. In addition, the presence of health care and higher education institutions lend stability to the economy. Major employers include Lawrence & Memorial Hospital (2,500 employees) and Connecticut College (909). The U.S. Coast Guard Academy is a major presence in the city with approximately 900 military and civilian employees. In April, 2013, the National Coast Guard Museum Association announced that it will open a 50,000 square foot museum on the waterfront near New London's multi-modal transportation center.
In 2010, Pfizer consolidated and relocated its research group from the city to its facility in Groton, CT. Electric Boat, a division of General Dynamics, purchased Pfizer's plant and has transformed the facility into a design center for the U.S. Navy's next generation of submarines. Electric Boat currently employs close to 3,000 individuals in New London, and is the largest taxpayer at approximately 3.1% of the city's tax base.
BELOW-AVERAGE SOCIOECONOMIC INDICATORS
The city's December 2013 unemployment rate remains elevated at 9.3% but less than the prior year's rate of 11.0%, as both employment and labor force have declined. These rates continue to considerably exceed the state and national averages of 6.8% and 6.5%, respectively. Income levels are below state and national levels. The city's 2011 median household income was 66% of the state and 86% of the national average. The poverty rate is 17.9% relative to the national rate of 14.3%. The below-average socioeconomic profile also includes a large student population, as the city is home to Connecticut College, Mitchell College, and the Coast Guard Academy.
MANAGEABLE LONG-TERM LIABILITIES
Debt levels are moderate, with net overall debt equal to $2,258 per capita and 2.8% of market value. Debt is rapidly amortized with 68% retired in 10 years. The city recently authorized bond issuance of $1.1 million to reimburse the general fund for paygo spending. Sale timing depends on whether there a petition for a referendum; the petition period expires May 15. If there is a referendum, the bond vote is expected in November at the general election, otherwise the $1.1 million sale is planned for before June 30, 2014.
Fitch believes the credit quality of the BANs is enhanced by the GO pledge securing the notes and the city's history of ready market access.
The city administers a contributory and non-contributory single-employer pension plan. The non-contributory plan has been closed and city contributions of $802,125 in fiscal 2013 covered plan expenses. The city fiscal 2013 contributions to the contributory plan of $665,031 equaled 67% of its ARC. As of the contributory plan's June 30, 2012 valuation, the unfunded liability was a moderate $5.5 million and was well funded at an estimated 84%, based on Fitch's conservative investment rate of 7%.
The city has pension plans for firefighters and certain other employees, with fiscal 2013 contributions of $705,013. Police union members participate in the state's Municipal Employees Retirement System. The city makes 100% of its ARC, which totaled $1 million in fiscal 2013. The city's teachers participate in the state's teacher plan for which the city has no obligation.
The city's unfunded OPEB liability was a moderate $29.8 million as of July 1, 2012. The city makes pay-as-you-go payments for OPEB and paid $1 million in fiscal 2013.
Total carrying costs for debt service, pension and OPEB pay-go of $9.9 million equaled a very manageable 7.6% of total government spending for fiscal 2013.
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);
--'Rating U.S. Municipal Short-Term Debt' (Nov. 27, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria