Fitch Rates New Haven, CT's GOs 'A-'; Outlook Remains Negative

NEW YORK--()--Fitch Ratings assigns its 'A-' rating to the following city of New Haven, CT's (the city) general obligation (GO) bonds:

--$54,110,000 GO refunding bonds, series 2014A;

--$36,075,000 GO bonds, series 2014B.

In addition, Fitch affirms its 'A-' rating on the city's approximately $500 million in outstanding GO bonds.

The Rating Outlook remains Negative.

SECURITY

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

KEY RATING DRIVERS

FINANCIAL STABILITY SLOW TO REBOUND: The Negative Outlook reflects the city's current limited financial flexibility attributed to a recent history of deficit operations and depletion of reserves. Management has raised tax revenues to meet expenses in its fiscal 2014 and 2015 budgets but liquidity remains low.

BOND REFUNDING RESTORES RESERVES: The refunding bonds are being issued to generate immediate cash flow savings that will largely eliminate deficit balances in general and internal service funds providing financial flexibility and negating the need for potential short-term cash flow borrowings.

ABOVE-AVERAGE DEBT RATIOS: The city's debt ratios are above average but are expected to remain stable as new issuance is expected to replace rapidly amortizing existing debt.

HIGH FUTURE RETIREE COSTS: Although the city has historically funded 100% of its pension actuarially required contribution (ARC), pension and other post-employment benefit (OPEB) unfunded liabilities are high. Carrying costs are about average but will continue to grow.

INSTITUTIONAL PRESENCE DRIVES ECONOMY: New Haven's economy benefits from the presence of higher education and healthcare institutions, including Yale University and Yale-New Haven Hospital. These institutions continue to attract development and investment from biotechnology, pharmaceuticals and life-science companies which is projected to result in tax base growth.

BELOW-AVERAGE WEALTH LEVELS: Wealth levels continue to trend below state and national averages. Unemployment rates have improved with growth in labor force and jobs, but levels remain high.

RATING SENSITIVITIES

STRUCTURAL BALANCE; RESTORATION OF RESERVES: Management's inability to achieve structural balance in both city and school operations will likely result in a rating downgrade. Progress in the restoration of reserves closer to historical levels is paramount to maintaining the rating.

CREDIT PROFILE

New Haven is located on the north shore of the Long Island Sound and is about 75 miles north of New York City. The city's population grew 5.7% from 2000 to 2013 and stands at 130,660.

LIMITED FINANCIAL FLEXIBILITY; RESERVES REMAIN LOW

The city's reserve levels have been depleted and carry negative balances after two consecutive fiscal years of deficit operations in the general fund and in internal service funds as self-insurance claims have outpaced revenues. Management has reacted by increasing revenues, securing employee concessions with bargaining groups, and restructuring debt to incur upfront cash flow savings.

Fitch does not consider the practice of restructuring debt for cash flow savings a prudent practice, but the city's very rapid debt amortization schedule does provide it with the flexibility to restructure its front-loaded debt to achieve budget relief over the next few years. The planned refunding does not result in an extension of existing bond maturities. In addition, the refunding is projected to result in net present value savings of more than 1% and only extends the average life of the city's debt modestly from 6.9 to 7.2 years.

Proceeds from the current refunding are projected to result in excess of $15 million in cash flow savings in fiscal 2015. Management's plan is to use approximately $5 million to increase general fund balance with remaining savings to be used to eliminate a portion of its 'non-case' reserve self-insurance fund deficit and medical self-insurance fund deficit. Addressing the self-insurance fund deficit is expected to free up the non-spendable balance held in the general fund of $4 million. The unrestricted general fund balance is projected to have a marginal positive balance after this refunding.

DEFICIT RESULTS FOR FISCAL 2013

The adopted $486 million fiscal 2013 general fund budget was a 2.4% increase over the fiscal 2012 budget. No tax increase was implemented but additional property tax revenue of $7.5 million was realized due to tax base growth. General fund operating results after transfers show a $13.5 million deficit. City operations suffered an approximate $4.5 million deficit due primarily to reductions in state aid which were unknown at the time of budget completion. Transfers out of $9 million were used to eliminate the city's cumulative deficits in its non-governmental funds and primarily to write off advances to the city board of education, particularly for its food service fund and daycare fund, which have been deemed uncollectible.

The fiscal 2013 unrestricted general fund balance declined to a negative $8.7 million (-1.6% of spending) from $3.8 million in fiscal 2012.

The city's medical and self-insurance funds ended fiscal 2013 with an aggregate deficit of $14.4 million, including $5 million of case reserves for outstanding litigation. The deficit of $14.4 million represents a moderate 2% of total governmental spending.

PROJECTED FISCAL 2014 OPERATIONS NEAR BALANCE

Management prudently approved a 2.27% increase ($11.1 million) in the property tax levy through a 4.9% millage increase. The levy increase combined with 1.5% growth in the city's 2012 grand list resulted in additional revenues to close a projected $12.3 million budget gap. The budget contained no one-time revenue sources or projected labor negotiated savings, as was a practice in prior year budgets. Notably, the budget included a $3 million increase in school funding and a $1.1 million increase in fire overtime.

Management is projecting balanced operating results in its general fund for fiscal 2014 as departmental spending remained generally in line with budgets. Higher than expected tax appeals and settlements have pressured revenues but tax collection rates remain strong. Medical benefit expenses increased above budget due to an increase in large claims resulting in a projected operational deficit in the medical self-insurance fund of $3.4 million.

The August 2013 refunding resulted in $4.1 million of premiums and savings transferred to the city's general fund for fiscal 2014, reducing the projected fiscal 2014 accumulated unrestricted general fund deficit to approximately negative $4.6 million (or -0.9% of budget).

FISCAL 2015 BUDGET BALANCED; HELPS RESTORE FUND BALANCE

The total budget of $508 million was up 2.19% or $10.8 million over fiscal 2014 and includes a .75 mill tax rate increase to $41.55. No non-recurring revenues or one-time expenditure savings are included in the budget, similar to fiscal 2014. Health insurance, debt, and capital costs drive the increase in the budget. The budget additionally includes $2 million for fund balance replenishment with $1 million allocated toward the general fund, $500,000 for the medical self-insurance fund, and $500,000 for equipment leasing in lieu of financing.

Management has made strides in achieving employee contract concessions with the majority of its bargaining units, resulting in pension plan changes and medical benefit cost savings. In addition to modest budget relief, pension and OPEB valuations should improve.

Proceeds from the current refunding and release of non-spendable fund balance is projected to eliminate the negative general fund balance in fiscal 2015. Remaining refunding proceeds will largely address the accumulated deficits in the self-insurance funds.

ABOVE-AVERAGE DEBT BURDEN

Overall debt levels, net of state school construction reimbursements, are above average at approximately $3,732 per capita and 5.6% of market value. Debt levels are expected to remain stable over the next few years as additional planned debt will be partially offset by the very rapid amortization of existing principal (76% in 10 years).

The current debt plan anticipates the delivery of $30 million to $50 million annually in new money debt over the next five years including school-related issuances.

LOW PENSION FUNDING LEVELS

Pension funded levels are low despite the city continuing to fund 100% of its ARC. The city maintains two single-employer defined benefit plans for general city employees and police and fire personnel. The most recent actuarial valuation as of June 30, 2012 shows an unfunded liability of $541 million (a high 6.2% of market value) and funded levels for the plans at 43% (general) and 48% (police and fire), using the plans' 8.25% assumed investment return rate. Adjusting to Fitch's more conservative 7% discount rate, the funded levels are estimated at a low 37% and 42%, respectively, and down from the respective 40% and 44% levels, a year prior.

Pension costs represented a slightly high $41.2 million, or 8.5% of the fiscal 2013 general fund budget. Notably, the increase in fiscal 2014 pension costs was only $800,000 as opposed to the original actuarially projected $2.7 million due to pension benefit changes included in recent contract settlements reached with its unions. Fitch anticipates the recent changes will also improve funded levels going forward.

The city's unfunded OPEB liability was $444 million as of July 1, 2011, the most recent data available. The city has set up an irrevocable trust to fund future obligations, but currently funds obligations on a pay-as-you-go basis. The city contributed $21.4 million in fiscal 2013, equivalent to 58% of the ARC and 3% of fiscal 2013 total governmental spending.

Total combined carrying costs for debt service, pension contributions and OPEB pay-go represent a moderate 18.7% of fiscal 2013 total governmental spending.

MIXED SOCIOECONOMIC INDICATORS

New Haven serves as a regional center for higher education, health care, transportation and the arts. The presence of the city's top two employers, Yale University and Yale New Haven Hospital, provide stability to the economy and continue to attract development and investment from biotechnology, pharmaceuticals and life-science companies.

Significant new developments have contributed to the city's tax base growth and a number of projects are in the pipeline. These projects are expected to increase employment opportunities and continue to attract new businesses to the city. The most recent property revaluation, effective October 2011, showed an increase in the city's market value of 16% to $8.6 billion. Net taxable values as of October 2012 and October 2013 were up 1.5% and 0.5%, respectively.

The city's unemployment rate remains elevated, but has improved to 9.9% in May down from 11.3% a year prior as growth in labor and jobs occurred. Wealth levels are below state and national averages as has historically been the case. The city's poverty rate is a very high 26.9% compared to the national rate of 14.9%

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, Zillow.com, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 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=845334

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Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1 212-908-0538
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Committee Chairperson
Arlene Bohner
Senior Director
+1 212-908-0554
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1 212-908-0538
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1 212-908-0833
or
Committee Chairperson
Arlene Bohner
Senior Director
+1 212-908-0554
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com