NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following Utica, New York (the city) securities:
-- $15 million unlimited tax general obligation (ULTGO) bonds, series 2007, 2008A, 2010A, and 2010B.
The Rating Outlook is revised to Stable from Negative.
SECURITY
The city has pledged its full faith and credit and unlimited taxing power for debt service on outstanding GO bonds. This pledge is subject to the 2011 state statute limiting property tax increases to the lesser of 2% or an inflation factor (the tax cap law). This limit can be overridden annually by a 60% vote of the city council. No exemption is made under the tax cap law for debt service on outstanding GO debt; however, the constitutionality of this provision has not been tested.
KEY RATING DRIVERS
OUTLOOK CONSIDERATIONS: The Outlook Revision to Stable from Negative reflects the overall stabilization of the city's financial profile, including increased general fund reserves, better financial reporting practices, and improved managerial collaboration.
FINANCIAL FLEXIBILITY REMAINS LIMITED: The city has successfully rebuilt reserves to levels Fitch considers adequate, after depleting them in fiscal 2012. However, Fitch believes that the city's current financial position will remain pressured over the near- to medium-term with scant margin for error and unforeseen events in execution of its budgets.
WEAK BUT IMPROVING LIQUIDITY: Liquidity is still a weak point, although it has been improving and the city has been reducing the amounts of its annual cash flow borrowing.
FINANCIAL REPORTING ISSUES MOSTLY RESOLVED: The city's fiscal 2014 audit was the first since fiscal 2011 to be released within the city's somewhat lenient required timeframe. Management expects the fiscal 2015 audit to be released within this required time frame, as well. Additionally, management has either resolved or taken steps to resolve the majority of past deficiencies highlighted by the auditors.
WEAK SOCIOECONOMIC INDICATORS: The city's socioeconomic indicators are weak, with below-average and falling wealth and income, elevated unemployment despite a declining labor force, and low per capita market value. Positively, the city has attracted a number of large developments in recent years; however, these developments have yet to materialize into economic gains.
MANAGEABLE LONG-TERM LIABILITIES: The city's debt profile is characterized by a moderate amount of rapidly amortizing debt and sizable carrying costs related to debt service and retirement benefits.
RATING SENSITIVITIES
DETERIORATION IN FINANCES OR TIMELY REPORTING: Unexpected deterioration of the city's financial position, negative change in the timeliness or quality of financial reporting, or reversal of stabilizing economic trends may result in negative rating action.
CONTINUED POSITIVE FINANCIAL TRENDS: Continued favorable financial trends, including the accumulation of reserves to solid levels and improved reporting procedures, may result in positive rating momentum over the medium term.
CREDIT PROFILE
Utica is the county seat of Oneida County ('A+'/Outlook Stable) and is located in central upstate New York in the area commonly known as the Mohawk Valley. The city's chronic long-term population out-migration trend appears to have moderated and shows early signs of reversal, with an estimated population of 61,808 in 2013.
STABILIZED, BUT VULNERABLE, FINANCIAL PROFILE
Two years of financial improvement have brought the city's unrestricted general fund reserve position to $3.2 million, or an adequate 4.9% of spending, for fiscal year 2014(year-end March 31). City management currently projects a modest $200,000 to $500,000 surplus as a result of fiscal 2015 operations. If a surplus were to materialize at the minimum of this range and be entirely unrestricted, unrestricted reserves would increase to $3.4 million, or 5.8% of audited fiscal 2014 spending. The city's reserve position is expected to now be above its very low charter-mandated fund balance policy of 5%. While improved, Fitch believes that the city's current financial position will remain pressured over the near- to medium-term.
Management has taken an increasingly active role in improving expenditure management and budgeting assumptions, which both became problematic in fiscals 2010 through 2012 as the city struggled with unions and lack of efficient managerial collaboration in a time of recessionary revenue pressures. During this period of time, unrestricted general fund reserves were completely exhausted.
Over the last two fiscal years, management has been able to settle almost all union contracts with healthcare concessions and further reduce city staffing (which is down a cumulative 17% since peak levels in fiscal 2009), which reversed the city's structural imbalance. Additionally, budgeting has grown increasingly conservative, with tempered sales tax expectations, an additional contingency line item, and improved financial monitoring.
Expenditure flexibility is relatively tight for the city, with management reporting that the extent of recent cuts have begun to somewhat affect the city's ability to provide core services. The city's ability to raise property taxes is capped by the state tax cap law, although overriding the cap requires only majority support of the city council. The city has been successful at gaining multiple larger levy increases in the past with city council approval.
The city's fiscal 2016 budget is balanced with no fund balance appropriation and the first flat property tax levy since at least fiscal 2007. Sales taxes comprise about 20% of city general fund revenue, and the city's assumption for 3.2% sales tax growth appears reasonable given recent trends. The city remains reliant on revenue outside its control with state and federal funding representing 26% of fiscal 2014 revenues. State aid in particular has declined annually since fiscal 2009, as New York State continues its statewide rollback of revenue sharing with municipalities. This trend is expected to continue into at least fiscal 2016.
IMPROVED FINANCIAL REPORTING
The city's fiscal 2014 audit was the first since fiscal 2011 to be compliant with the city's lenient ongoing reporting requirement (ie: 270 days from close of fiscal year). The improved turnaround time in fiscal 2014 was driven by timelier communication between the city and its auditors. Additionally, the city's fiscal 2014 audit resolved several material weaknesses and significant deficiencies highlighted in the fiscal 2013 audit, although seven highlighted material weaknesses remain. Management reports that they have taken steps to implement formal procedures that are expected to resolve the remaining weaknesses and deficiencies. Fitch expects that subsequent audits will be released consistent with the city's continuing disclosure reporting requirement and with reduced weaknesses and deficiencies.
LIQUIDITY IMPROVING BUT STILL WEAK
The city's dependence on liquidity borrowing remains a credit risk, despite a decreasing trend. The city's cash flow borrowing in fiscal 2016 is projected to be less than $4.5 million (a manageable 6.8% of budgeted revenue), a decline from $12 million in fiscal 2013 (10.6% of revenue). The city's dependence on the capital markets for cash-flow solutions is concerning given the city's below-average credit ratings, although management has found success for a number of years utilizing private placements with a local bank.
WEAK ECONOMIC BASE
The city's socioeconomic indicators are weak, most notably reflected in the city's individual poverty rate, which is nearly twice the national average. Consistent with the upstate New York region, income and wealth levels are low, with median household income at 53% and 58% of state and national averages, respectively and on a mildly declining trend. Market value per capita is weak at $23,000 and, while assessed valuation has been stable, market value has declined each year since fiscal 2013, down an aggregate 6% through fiscal 2016.
While the city's socioeconomics may be weak, the city does serve as a regional economic hub for a large portion of the Adirondack area. The services sector remains a major contributor to the local labor market, with entities such as Metropolitan Insurance, Bank of America, Saranac Brewery, and Mohawk Valley Network, a major medical facility, as well as other health care and social service providers operating in and near the city. The regional economy has seen some improvement with the redevelopment of Griffiss Business and Technology Park (formerly Griffiss Air Force Base) in nearby Rome.
The city expects to benefit significantly from a $1.5 billion Computer Chip Commercialization Center constructed on the SUNY Polytechnic Institute campus that is expected to open in spring 2015 and attract between 1,500 and 2,200 new jobs. Additionally, the city has been aggressively pursuing and attracting new economic development to the downtown and harbor areas. However, as of this writing, these initiatives have yet to materialize into either employment or tax base gains.
The city's unemployment rate of 6.9% in February 2015 is well below past highs, but above state and national averages. Improvement is due to year-over-year labor force declines outpacing year-over-year employment declines.
MANAGEABLE LONG-TERM LIABILITIES
Fitch considers the city's overall debt levels to be above average, with high debt as a percent of market value at 6.2% (reflective of the city's weak tax base) but low debt per capita of $1,422. Amortization is rapid, with 88% of principal retired within 10 years. The city's capital needs appear to be limited, although the city does not maintain a multi-year capital improvement plan. The city is planning on issuing up to $8.2 million in May 2015, which would not have a material impact on the city's overall debt profile.
The city provides OPEB on a pay-go basis, which in fiscal 2014 was 64% of the actuarially required contribution amount. The city's OPEB unfunded actuarially accrued liability is $56.7 million or an elevated 4% of market value. Per New York state law, the city is not permitted to set up a trust to prefund this liability.
The city participates in a state-run cost-sharing defined benefit pension plan, New York State and Local Employee Retirement System (NYSLERS), which was overfunded at 101% at fiscal year-end 2014; using Fitch's more conservative 7% discount rate, the funded rate remains a still high 84%. The city participates at the maximum level in the state pension payment cost stabilization plan, which allows deferral of up to 20% of annual pension costs. This amortization option provides some near-term budget relief but may make future year budgeting for these payments more challenging.
Carrying costs related to debt service, pension contributions, and costs related to other post-employment benefits (OPEB) are a sizable 23% percent of total governmental spending. Carrying costs are expected to decline after debt service peaks in fiscal 2015, which may offset any increasing pension payments related to the amortization of deferred contributions for a more limited net effect.
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, and Zillow.
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=983129
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