NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to the city of Milford, CT's (the city) general obligation (GO) bonds and bond anticipation notes (BANs):
--$14,195,000 GO bonds, series 2014, 'AA+';
--$9,990,000 GO BANs, Lot A, 'F1+';
--$1,810,000 GO BANs, Lot B, 'F1+'.
The bonds and notes are scheduled to sell competitively on Oct. 29th. The proceeds of the bonds will be used to finance outstanding BANs and provide funding for various public improvement, school and sewer projects. The BANs are being issued to fund city, school and sewer projects.
In addition, Fitch affirms the city's following ratings:
--$111 million outstanding GO bonds, at 'AA+';
--$4.03 million outstanding BANs at 'F1+'.
The Rating Outlook is Stable.
SECURITY
The bonds and notes are general obligations of the city, backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
ABOVE-AVERAGE SOCIOECONOMIC PROFILE: The city benefits from a stable economy with above-average real estate valuations, high wealth levels, and a relatively diverse tax base.
SOUND FINANCIAL MANAGEMENT: Management's conservative budget practices, moderate property tax increases and prudent debt policies have contributed to the maintenance of solid reserve levels providing for financial stability.
MODERATE DEBT LEVELS: Milford's debt burden is moderate and its long-term obligation profile benefits from above-average amortization and manageable borrowing plans.
RETIREE COSTS WELL-FUNDED: Pensions are well funded and other post-employment benefit (OPEB) liabilities, while moderate, are carefully managed and are not expected to over-burden the credit.
PROVEN MARKET ACCESS: The 'F1+' rating on the BANs reflects the city's strong long-term credit characteristics and history of successful market access.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and maintenance of healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.
CREDIT PROFILE
The city of Milford is located in New Haven County between New Haven and Bridgeport. The city has 17 miles of shorefront property along the Long Island Sound and a 2013 population of 53,137.
ABOVE-AVERAGE SOCIOECONOMIC PROFILE
Residents benefit from easy access to the employment market in southern Fairfield County via Interstate 95, the Merritt Parkway, and Metro North rail. Residents are affluent, with median household incomes equal to 150% of the national average and 114% of the state's high average. Market value per capita is high at $172,000 based on the city's fiscal 2015 estimated market value of $9.2 billion. The city's August 2014 unemployment rate improved to 6% from 6.9% the year prior and the city has experienced growth in both jobs and labor force. The city's rate remains below the state's rate of 6.9%.
Milford is primarily residential with some commercial and industrial presence represented by retail shopping centers and two power plants. The top 10 taxpayers, excluding the power plants, represent a moderate 8.5% of taxable value. The two power plants, Milford Power and GenConn Energy have entered into separate long-term payment in lieu of tax (PILOT) agreements with the city and their valuations are not included in the city's taxable assessed value. Milford Power's PILOT agreement is terminating in January 2015 and city officials have indicated that they are currently in negotiations with Milford Power for a new 10 year PILOT agreement. In the event an agreement is not reached, the plant would return to the tax rolls, mitigating any revenue risk from a delayed agreement.
Top employers include the city's Board of Education (BOE) with 1,350 workers, Subway world headquarters (929), Milford Hospital (800), and Schick Manufacturing, Inc., the razor manufacturer (625).
SOUND FINANCIAL PERFORMANCE
The city's financial position continues to be sound. For fiscal 2013 the city realized higher than budgeted property tax collections and revenues from the sale of delinquent tax liens. Property taxes, excluding PILOT payments, represented a high 87% of fiscal 2013 budgetary revenues. Expenditures were flat as departments did not overspend their budgets. The city had emergency expenses as a result of Hurricane Sandy totaling $1.4 million and used unassigned fund balance to cover these costs. Transfers out of the general fund also included $766,000 towards the vehicle replacement fund.
General fund operating results after transfers reported a surplus of $2.8 million (1.4% of spending) resulting in an unrestricted fund balance of $23.9 million or a strong 12% of spending, on a GAAP basis. Fiscal 2013 unassigned fund balance totaled $15 million, equal to 7.5% of revenues, which is in line with management's informal goal of a minimum of 5% and target of 7%-8%.
EXPECTATIONS FOR FISCAL 2014
For the city's fiscal 2014 budget, management returned to its typical practice of including a portion of fund balance to balance its budget and reduce pressure on its mill rate. The budget included a $5 million use of fund balance and a 2.6% mill rate increase to 26.28.
Management has indicated that it anticipates usage of only approximately $1.3 million of fund balance as operating revenues exceeded expectations and expenses were less than budgeted. Additionally, the city received a FEMA reimbursement of $1.3 million for Storm Sandy. The city continued its vehicle replacement funding and made a general fund transfer out of approximately $643,000 for these costs. Unrestricted fund balance is projected to decline modestly but still remain solid.
FISCAL 2015 BUDGET UP MODESTLY
The fiscal 2015 budget totals $199 million and increased by 2.2% over the fiscal 2014 budget. The tax rate was increased by 0.94 mills. The budget includes use of $4 million in fund balance, compared to $5 million the prior year. The increase in expenditures was primarily related to debt service, employee benefits and education costs. Management has reported that building permits are projected to exceed budgeted amounts as residential development is occurring along the shoreline in response to the damage incurred from Storm Sandy. Fitch expects that management will continue to maintain solid reserve levels through its conservative budget practices and prudent monitoring of expenditures throughout the year.
MODERATE DEBT BURDEN
Debt ratios are moderate with overall net debt of $171 million equal to $3,222 per capita and 1.9% of market value. Fiscal 2015 budgeted debt service is a modest 7% of general fund spending, below the city's informal policy limit of 10%. The five-year capital improvement plan includes approximately $105 million in borrowing over the next five years, much of which is for school projects and sewer improvements. Fitch believes that the city's debt burden will increase but remain manageable due to its above-average amortization rate of 61% of debt retiring in 10 years and the city's restrictive annual debt service policy.
RETIREE COSTS WELL-FUNDED
The city operates a single-employer pension plan which covers Milford's full-time employees with the exception of teachers, who are covered by the state's plan. The state is responsible for costs related to teacher pensions. The city plan was funded at an estimated high 90% level using Fitch's 7% investment rate of return (IRR) based on the plan's July 1, 2013 valuation.
The city continues to make 100% of its annual required contribution (ARC) and contributed $324,000 and $2.2 million in fiscals 2013 and 2014, respectively, and budgeted $3.9 million in fiscal 2015. The ARC increased substantially due to a gradual lowering of the plan's IRR to 7.75% from 8.25% and fiscal year 2015 represents the final year of a five year-smoothing of investment losses incurred in 2008 and 2009.
The unfunded liability for OPEB is $272 million or an elevated 3% of market value based on the July 1, 2012 valuation. Management has successfully negotiated health insurance premium sharing increases with certain of its union groups as well as other cost saving insurance plans. It expects its future liability valuations to decline as a result. Management has established a trust for the city's portion of future OPEB liabilities and has made transfers of $0.5 million to the trust in each of the last five years. Trust assets totaled $4.6 million at Aug. 31, 2014, as reported by management.
Total carrying costs for fiscal 2013 debt service, pension ARC, and OPEB pay-as-you-go costs were a moderate to low 9.4% of total fiscal 2013 governmental spending. Fitch expects carrying costs to increase slightly due to growing pension costs but they should still remain manageable.
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, and 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
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
Rating U.S. Public Finance Short-Term Debt
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=907055
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