Fitch Rates Worcester, MA's $81MM GOs 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns an 'AA-' rating to the following general obligation (GO) bonds for the city of Worcester, Massachusetts (the city):

--$60,494,080 GO municipal purpose loan of 2014 bonds, series A;

--$13,979,420 DCU special improvement district bonds (taxable), series 2014B;

--$7,160,000 GO refunding bonds, series 2014C.

The bonds are scheduled to sell competitively on Dec. 9. Proceeds of the series A bonds will be used for various citywide and water and sewer capital improvements and to refund a portion of the outstanding series 2006 bonds; series B bond proceeds will fund DCU arena and convention center facilities; and series C bonds will refund a portion the city's outstanding series 2004A GO bonds.

In addition, Fitch affirms its 'AA-' rating on the city's outstanding $553 million of GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the city and are backed by its full faith and credit and a property tax levy that is limited by state statute.

KEY RATING DRIVERS

CONTINUED IMPROVED FINANCIAL PERFORMANCE: Solid financial results in the past five fiscal years have led to growth in the city's reserve levels to adequate levels. Financial flexibility is enhanced by management's maintenance of a cushion under the primary and secondary property tax cap.

SIZABLE FUTURE RETIREE COSTS: Unfunded employee benefit obligations are very large, but the city continues to manage these commitments and consistently funds its required pension contributions. Total carrying costs are moderate.

ECONOMY BOLSTERED BY STRONG INSTITUTIONS: The city benefits from the presence of well-established higher education and healthcare institutions, providing stability to the economy.

STRONG MANAGEMENT PRACTICES: The city's recent history of positive operating results is a reflection of its strong financial management, prudent fiscal policies and conservative budgeting practices.

POSITIVE ECONOMIC DEVELOPMENT: Major development projects underway or recently completed in the city are contributing to measurable economic growth and are expected to boost taxable values modestly.

BELOW AVERAGE WEALTH LEVELS: Wealth levels are below state and national averages but levels are skewed somewhat due to the large student population. Unemployment rates have historically exceeded state averages.

RATING SENSITIVITIES

CONTINUED BALANCED OPERATIONS: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong prudent budgeting practices, maintenance of adequate reserves and ability to address growing employee benefit costs.

CREDIT PROFILE

Worcester is located roughly 39 miles west of Boston and serves as the economic hub of central Massachusetts. Significant economic development efforts in the last several years have led to increased investment in the city and continue to attract new business ventures and residential projects. The city's population of 182,544 is up 1.6% over five years and 5.7% since 2000.

FINANCIAL FLEXIBILITY IMPROVES

The city's recent trend of positive operations and historically strong fiscal policies has bolstered its financial profile. The improvement in the city's finances has occurred despite the recessionary pressures that resulted in state aid cuts, pension fund investment losses, and a weakness in economically sensitive revenues. To offset these financial pressures, management instituted operational reforms, reduced staff levels, and continues to make conservative budgeting decisions. These actions, along with constant budget monitoring, contributed to the city's positive operating results in each of the last four fiscal years. A fifth year of positive results is projected for fiscal 2014.

The city experienced a general fund operating surplus (after transfers) of $3.6 million (0.6% of spending) in fiscal 2013 following an $8.1 million surplus (1.4% of spending) in fiscal 2012. The city's unrestricted general fund balance at fiscal 2013 year-end totaled $27.9 million or an adequate 5% of operating expenditures. The positive results stemmed from motor vehicle and other excise taxes and intergovernmental revenues outpacing conservative projections and expenditures coming in less than anticipated.

The fiscal 2014 budget of $564 million represented a 2.7% increase over fiscal 2013. Education, the largest single item, climbed 4.3% ($12.2 million) due to increases in mandatory spending. Helping offset this increase was a rise in state aid of $9 million, earmarked primarily for schools. Debt, pension and health insurance cost growth also contributed to the increase. Moderate tax base growth of 1.4% provided $4.5 million in additional tax levy revenues.

Management projects essentially break-even operations in fiscal 2014. Unrestricted fund balance is projected to remain at approximately 5% of spending. The city's other reserve balances, including undesignated special revenue funds and debt service reserves, totaled $24.5 million (4% of fiscal 2014 general fund spending) and provide the city with additional financial flexibility. Motor vehicle taxes, permits and licenses and other taxes exceeded estimates and offset lower intergovernmental and property tax revenue expectations. Expenditures were under budget by $2.2 million as many of the city's departments achieved savings.

The fiscal 2015 budget of $575 million reflects increases in education costs of 2% and moderate increases in debt (3.3%), pension (6.8%) and health insurance (3.5%) costs. Estimates for non-property tax revenues were conservatively estimated at below fiscal 2014 actuals for most items reflecting continuation of prudent budget practices. A contingency for expected costs associated with open major labor contracts was also included. Such contracts remain unsettled after expiring June 30, 2013. As such, Fitch has some concerns over the period of time that has elapsed without a mutual agreement being reached.

PROPOSITION 2 1/2 LIMITS TAX LEVY

The city is subject to property tax levy limits imposed by the state's Proposition 2 1/2. Proposition 2 1/2 is a two-prong test, whereby the tax levy cannot exceed 2.5% of the full and fair cash value (primary limit) and cannot exceed the prior year's maximum levy by more than 2.5% excluding new construction (secondary limit). For fiscal 2014, the city levied $14.9 million below the primary levy limit and $10 million below the secondary limit.

The city has historically kept a $10 million cushion below its secondary limit. Fitch expects the city to retain the financial flexibility that this cushion affords going forward based on management's history of conservative budgeting practices.

EXPANDING ECONOMY

A number of commercial and residential projects have been completed in the city over the last five years, and the city continues to have numerous projects in various stages of development, adding to the revitalization of downtown. The largest of these are the $565 million multi-phased mixed-use CitySquare project and $100 million expansion of the city's rail terminal, increasing freight rail options to the city and express train service to Boston.

The city's taxable assessed value (TAV) of $11.2 billion grew marginally by 2.7% over the last two years. Fitch believes prospects for incremental growth over the near term are reasonable given ongoing development city-wide.

BELOW-AVERAGE SOCIOECONOMIC INDICATORS

The city's wealth levels have historically been below state and national averages, partially due to the large student presence. The September 2014 unemployment rate of 7.9% remains above the state average (6.2% for the same period) but is down from 9% a year prior. Employment and labor force grew 2.6% and 1.4% respectively over that period.

The presence of 10 higher education and several major healthcare institutions provides stability to the local economy. The full-time student population is estimated at over 30,000 and is comprised in part by the College of Holy Cross, Clark University, Assumption College, UMass Medical School, and Worcester Polytechnic. UMass Memorial Health Care is the largest employer with 13,200 employees, followed by UMass Medical School (4,282), Reliant Medical Group (2,170) and Saint Vincent Hospital (2,120).

MODERATE DEBT LEVELS, LARGE FUTURE RETIREE COSTS

Overall debt ratios, excluding self-supporting debt, are moderate with debt per capita at $3,301 and 5% of 2014 equalized value of $12.2 billion. Debt amortization is rapid with 66% paid off in 10 years.

The city's combined long-term liabilities related to retiree benefits are large. The city administers the Worcester Retirement System, a defined contribution plan for certain employees, excluding teachers. The city's unfunded pension liability was $400 million as of Jan 1, 2014, down from $411 million the year prior. The total represents a moderate 3.3% of market value. Using Fitch's conservative 7% discount rate assumption, the estimated pension plan funding level was a low 61%.

Fitch notes as a credit positive the city's practice of consistently funding its pension ARC. The city is making recommended contributions subject to a 4% annual increase that result in full funding by June 30, 2031 (17 payments remaining). Such annual growth in pension costs assume a 7.75% annual rate of return on investments and are likely to pressure future budgets given the below average funded ratio and required annual increases.

The city's unfunded OPEB liability totaled $727 million as of July 1, 2013, equal to a high 6% of equalized value. This is up $91 million from the 2011 valuation due to a combination of changes in mortality assumptions, an added excise tax as a result of the Affordable Care Act, and an increase in the implicit subsidy for pre-Medicare retiree costs. The city established an OPEB trust in fiscal 2011 and has begun making contributions in excess of its pay-go costs. The estimated balance for fiscal 2014 is modest relative to the liability at $7 million. OPEB contributions in fiscal 2013 totaled $20.4 million, or 44% of the ARC.

Total carrying costs, comprised of debt service, pension and OPEB contributions, for fiscal 2014 equaled a moderate 15% of total governmental fund spending.

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 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).

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=939955

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Contacts

Fitch Ratings
Primary Analyst:
Kevin Dolan, +1-212-908-0538
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
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Kevin Dolan, +1-212-908-0538
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
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com