Fitch Rates Hamden, CT'S GOs 'BBB+'; Outlook Remains Negative

NEW YORK--()--Fitch Ratings has assigned the following ratings to issuances by the town of Hamden, Connecticut:

--$26.4 million general obligation (GO) bonds, 2014 series A rated 'BBB+';

--$17.96 million GO bond anticipation notes (BANs) 2014 rated 'F2'.

The bonds and notes are expected to be sold through negotiation on August 12.

The bond proceeds will fund notes maturing on August 21 which were issued to fund various public improvements. The BANs will be used to fund town and school capital improvements.

In addition, Fitch affirms the following ratings:

--$119 million GO bonds at 'BBB+'.

The Rating Outlook for the bonds is Negative.

SECURITY

The bonds and BANs are general obligations of the town backed by its full faith, credit, and unlimited taxing power.

KEY RATING DRIVERS

SLOW PENSION FUNDING PROGRESS: The Negative Outlook is based on the poor funding of the town's pension plan and the need for substantial tax rate increases or benefit reform to avert plan insolvency.

SLIM FINANCIAL RESERVES: The Negative Outlook also reflects Fitch's concern that satisfactorily addressing the severely underfunded pension will be particularly challenging given the town's other financial pressures, including marginal reserves.

TAX INCREASES HELPING OPERATIONS: Management forecasts positive, albeit modest, operating results in fiscal 2014. A fiscal 2015 tax increase primarily provides for increased pension contributions. Even with the increase, the pension payment is well short of the actuarially-based contribution.

STRONG DEMOGRAPHIC PROFILE: Wealth levels are favorable and the poverty rate is low. The area economy benefits from a strong education and healthcare sector, and an unemployment rate which approximates the national rate.

DEBT EXPECTED TO RISE: The planned issuance of pension obligation bonds (POBs) will almost double the town's outstanding debt while only partially addressing the unfunded liability. Overall debt metrics would still not be high. However, substantial increases in carrying costs are expected over the next five years.

ADEQUATE MARKET ACCESS: The 'F2' short-term rating reflects the general credit characteristics of the town and Fitch's expectation for adequate market access.

RATING SENSITIVITIES

PENSION FUNDING PROGRESS: Inability to follow through on plans to continue to address the significant unfunded pension liability, including issuance of POBs and sufficient increases in tax rates, will likely result in additional rating action.

WEAKENED FUND BALANCE: Further erosion of currently weak reserve levels could place downward pressure on the rating.

CREDIT PROFILE

Hamden is a mid-sized town, with a population of 60,868, located about 10 miles north of New Haven.

VERY HIGH PENSION AND OPEB LIABILITIES

The funded status of the town's (closed) pension plan has been extremely poor for some time. The July 1, 2012 funded ratio was 14% and the unfunded actuarial accrued liability (UAAL) was $360.4 million. Draft actuarial results for July 1, 2014 indicate the UAAL is $399 million, or a high 6.9% of the market value of real property, and the funded ratio is 10%.

The town also has a large unfunded other post-employment benefit (OPEB) liability of $440 million (as of July 1, 2012) or 8% of market value. Hamden funds its OPEB on a pay-as-you-go basis, contributing $16.7 million of the $33.9 million cost in fiscal 2013.

Together with debt service costs of $16.3 million in fiscal 2013, the servicing of long-term liabilities, which assumes full funding of the pension actuarially required contribution (ARC) but the pay-go amount for OPEB, would consume close to 27% of governmental fund spending, which Fitch considers high. The actual pension payment fell short by $17.8 million.

STEPS TO PENSION SOLVENCY ONGOING

The town's pension plan is estimated to be insolvent in about 2018 absent action. The town is currently preparing required documents for submission to the state for review of its financing plans of $125 million in POBs. The bonds would reduce the UAAL by approximately 33%. The state has up to two months to conduct its review and POB issuance is expected before the end of the calendar year. At present, the town charter restricts POB debt service to 4% of the budget and the POB sizing is expected to fully utilize issuance capacity. The fiscal 2015 budget includes $3.4 million for the first interest payment on the POBs. Recently passed special state legislation allows the town to step up to full ARC funding over five years as opposed to the statutory requirement of full ARC funding upon POB issuance.

The funding of the town pension plan fell to a low $3 million in fiscal 2012, only 15.3% of the ARC. Since then, the town has increased the payment each year and the fiscal 2015 budget appropriates a $13.75 million payment, a sizable increase in funding but still far short of the $29 million ARC.

Upon POB issuance, statutes require the town to annually submit certain documents to the state, including an actuarial valuation of the pension plan. Previously the town had actuarial valuations done biannually; an annual valuation will enhance the ability to monitor the plan's funding status, particularly as contribution and benefit provisions adjust. Beginning in 2013 the town shifted from an automatic 3% COLA to a consumer price-based COLA of 1.59% as is permitted under the plan.

A January 2013 consultant report identified savings from lowering the future defined benefit accruals to 1.5% of final average salary. Under the pension plans the multiplier for the computation of benefits ranges from 2% to 3%, depending on the years of service and the class of employee. The town has not formally initiated pension reform discussions with labor and such discussions may not occur until 2015 for guardian (police and fire) employees and 2016 for service employees, based on the stated expirations in the last amendments to the pension plan.

FINANCIAL PROFILE IMPROVING BUT STILL WEAK

Maintenance of financial health while the pension ARC ramps up is key to credit health. The town enacted tax rate increases in each of the past five years, with a total five-year rate increase of 35.8%. According to 2012 levy per capita data compiled by the state, the town was in the lower half of municipalities in the state, affording some room for tax increases. Tax increases to date have improved general fund structural balance, but full pension ARC funding is far from achieved and financial operations remain weak.

Significant operating deficits in fiscal years 2010 and 2011 drew down the town's balances. In fiscal 2012 financial margins improved due to a tax rate increase, expenditure reductions, and heightened pension underfunding. In 2012 only 13.7% of the ARC was funded. The town closed fiscal 2013 with a $494 thousand general fund operating surplus (0.2% of spending) and a very slim unrestricted balance of $1.7 million (.8% of spending). Management is forecasting an approximate $500 thousand general fund surplus in fiscal 2014, enabled in part from savings from healthcare coverage reforms.

BALANCED FISCAL 2015 BUDGET

The town's fiscal 2015 budget is balanced and includes a 2.5% property tax rate increase which generates an additional $4.5 million over the previous budget. Appropriations for pension-related expenses increase by $5.4 million. Budget to budget, total appropriations increased by 3.3%. Labor contracts are in place (except for police and fire) through June 2017, with raises of 2% for each of the final three years.

DEBT LEVELS EXPECTED TO REMAIN MIDRANGE WITH POBS

With the current offering total debt is $158.5 million, representing a moderate $2,573 per capita or 2.7% of market value. The planned $125 million pension obligation bonds issuance represents a substantial increase in debt; however, debt levels will still be just on the high end of midrange. Overall long-term obligations (debt, pension, OPEB) are high.

The town's six-year capital improvement plan identifies $62 million in capital needs, with almost a third of the projects related to public works. Town charter limits capital-related debt service to 10% of budget and the town is well under the policy.

EDUCATION & HEALTHCARE ANCHOR ECONOMY

Several universities are located in the town, resulting in a sizeable and stable education sector presence. Most notably, Quinnipiac University (851 employees) lies within the town's borders, and Yale University (13,084 employees) is in adjacent New Haven. The town also benefits from the presence of several healthcare providers, such as Ardenhouse Care and Rehabilitation Center, a top employer with 370 employees.

The town's May 2014 unemployment rate of 6.9% compares favorably to the New Haven metropolitan statistical area (7.7%), and approximates the state (6.9%) and national (6.1%) rates. The town's labor force is exceptionally skilled, with nearly 42% of the adult-aged population holding a bachelor's degree or higher (or about 150% of the national norm). Wealth levels for the town are at least 20% greater than those of the nation and the poverty rate is a low 7.8%

STABLE TAX BASE, POSITIVE ECONOMIC ACTIVITY

The estimated full value of the taxbase is a sizable $5.8 billion, or a favorable $94,000 per capita. The town's tax base exhibited resilience during the recent housing correction. After falling a moderate 6.6% in fiscal 2011 due to the 2010 revaluation, the tax base stabilized. Several commercial projects are underway in the town which should bolster prospects for tax base growth.

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. Public Finance Short-term Debt' (Dec. 9, 2013).

Applicable Criteria and Related Research:

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

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=842477

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Patricia McGuigan, +1-212-908-0675
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Patricia McGuigan, +1-212-908-0675
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com