Fitch Rates Waterbury, CT's Series 2015 GOs 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the following city of Waterbury, CT's (the city) general obligation (GO) bonds:

--$22,000,000 GO bonds, Lot A;
--$8,000,000 taxable GO bonds, Lot B.

The bonds are scheduled to price via negotiation on or around November 18. The lot A bonds are being issued to fund various city and school projects. Proceeds of the lot B bonds will finance public projects including Waterbury Industrial Commons.

In addition, Fitch affirms its 'A+' rating on the city's $429 million of outstanding GO bonds.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

CONSISTENT OPERATING RESULTS: Management has demonstrated stable operating performance resulting in maintenance of adequate reserves.

MIXED ECONOMIC PROFILE: Wealth levels are below state and national averages and unemployment levels have experienced improvement, but remain high. Modest economic expansion is evident based on job growth and slight tax base growth.

ABOVE-AVERAGE DEBT LEVELS: Debt levels are high and are expected to only increase moderately with implementation of the city's capital plan. Par amortization is average.

HIGH FUTURE RETIREE COSTS: Unfunded employee benefit obligations for pensions and OPEB are very high. OPEB liabilities are projected to decline as a result of recent health insurance modifications, but remain high. The city continues to fully fund its actuarially required pension contribution.

RATING SENSITIVITIES

BALANCED OPERATIONS: Fitch expects city operations to remain balanced as growth in health insurance costs have been tempered, cost containment measures remain in place, and as the economy improves. Results contrary to these expectations could result in a change in the rating.

CREDIT PROFILE
Waterbury is located in the west-central portion of Connecticut, 21 miles north of New Haven, and has an estimated 2014 population of 109,307. Population has seen a slight decline of 0.9% since 2010.

SOUND MANAGEMENT PRACTICES LEAD TO FINANCIAL STABILITY
Waterbury's general fund operations continue to remain stable. Covenants associated with the city's special capital reserve funding (SCRF) bonds require the city to operate with certain financial constraints, contributing to the city's general fund stability over the past several years.

The provisions for the SCRF bonds require the city to continue to appropriate any funds in excess of 5% of reserves for pay-as-you-go funding of capital, transfers to other funds requiring subsidies, or the redemption of the tax-exempt series 2007 SCRF bonds. This provision remains in place through maturity of the bonds in 2022 or the refunding of the series 2007 bonds with taxable bonds, whichever is earlier.

Management has indicated its intention to keep its financial policies in place, consistent with the requirements of its SCRF bonds, and plans to continue to use revenues in excess of 5% of its general fund reserve towards capital improvements or to subsidize other funds. Fitch believes this to be prudent as these practices have provided the city with excess designated reserves, helping to promote general fund flexibility.

Financial results for fiscal 2014 were positive with a net budgetary surplus of $3.1 million. Management continued its practice of transferring budgetary surpluses over and above the minimum 5% unrestricted fund balance level to support internal service funds, debt service funds and capital initiatives. Positive revenue variances were due to stronger than budgeted tax collections and expenditure savings achieved in all areas. Unrestricted general fund balance totaled $22.4 million or an adequate 5.5% of spending. When reserves from external funds are included total reserve levels increase to closer to 10% of spending.

GROWING HEALTH INSURANCE COST PRESSURES MITIGATED
The city experienced higher than anticipated health benefit costs in fiscal 2014 and this internal service fund experienced an $8.6 million operating loss. This resulted in a negative net position of $4.6 million (7% of health insurance budget). Management prudently raised property taxes in fiscal 2015 to support an appropriation of $5.5 million to the health benefits fund to support the operating imbalance.

Management made a one-time transfer of its accumulated OPEB reserves of $17.7 million to the health benefit fund during fiscal 2015 to eliminate the existing negative position and offset approximately $8.4 million of the fiscal 2016 increase in health insurance costs. This transfer increases the fund's net asset position to a positive $6.1 million for fiscal-end 2015 and supports a balanced budget for fiscal 2016.

Recognizing the growing costs of these benefits, management has successfully negotiated a new higher deductible health insurance plan for a majority of its existing employees. Additionally, it has negotiated with its retirees age 65 or over to move to Medicare as its primary insurer. Management reports that projected annual savings from these actions should be in the range of $5 million-$7 million (approximately 16% of current retiree health care spending) beginning in fiscal 2017.

Fitch expects these actions to promote stability in this operating fund and help control the growth in long-term liability costs.

FISCAL 2015 PROJECTIONS POSITIVE
For fiscal 2015, management projects a $3.9 million budgetary surplus and no use of the $3 million fund balance appropriated for mil rate relief; $3.75 million of the budgetary surplus will be allocated to funds outside the general fund as has been management's historical practice. The unrestricted general fund is projected to increase by $173,000 to $22.7 million or 5.8% of spending. Tax revenues again outpaced budgeted amounts as the city prudently budgets for 96% tax collections and has reported collections of 97.2% for fiscal 2015.

FISCAL 2016 BUDGET STABLE
The fiscal 2016 budget is up a modest 0.64% to $393 million and includes no change in the millage rate. Debt service and pension costs increased moderately. A contingency of $4.2 million was established which is $2.1 million higher than the previous year primarily to account for open labor contracts.

Property taxes accounted for 60% of the budget and state aid, primarily for schools, represented 34%. Grand list growth of 1.26% for fiscal 2016, primarily from growth in personal property values, generates an additional $2.5 million in revenues for the general fund.

LOW WEALTH; IMPROVING UNEMPLOYMENT LEVELS
The city's proximity to Interstate 84 provides easy access to Hartford and major cities north and south and has helped in attracting new businesses to the city. Waterbury's economy is driven by manufacturing but it also has higher education, health care and a significant retail presence. Besides the city (3,745 employees), the next largest employers are Waterbury Hospital (1,973) and St. Mary's Hospital (1,752).

To help improve historically high unemployment levels, city officials continue to place a greater emphasis on their economic development strategy. Management continues to take advantage of state and federal programs and grants to support these efforts. The city unemployment rate of 8.9% for August 2015 declined from 10.7% a year prior as employment grew 1.9% and the labor force remained unchanged. The rate remains above the state's rate of 5.5% in August. Wealth levels have consistently been below state and national averages with 2013 median household income at 77% of the national average and 59% of Connecticut's above-average levels.

The city underwent its statutorily required five-year tax base revaluation effective Oct. 1, 2012 (for fiscal 2014). The tax base experienced a 24% decline, primarily reflecting the drop in residential values. Cumulative tax base growth of 1.45% has occurred the past two years and market values equate to approximately $5.8 billion. Median home prices remain significantly below their highs reached in 2007 and declined 2.4% year over year through August according to Zillow.com. The top 10 taxpayers represent a moderate 11% of assessed value.

DEBT LEVELS ARE ABOVE AVERAGE
The city's debt levels increased substantially in 2009 with the issuance of $313 million in pension obligation bonds (POBs). Overall debt ratios, including POBs, are above average at $4,127 per capita and a high 7.8% of market value (MV), net of self-supporting water and sewer debt. The issuance of the POBs greatly reduced the city's unfunded pension liability.

After this issuance, the city plans to issue an additional $29 million in bonds in fiscal 2018 and potentially an additional $16 million in fiscal 2020. The city plans to structure debt service, net of pension bonds, at a level not to exceed 6% of general fund expenditures. Principal amortization is average at 50% within 10 years.

UNFUNDED PENSION AND OPEB LIABILITIES ARE HIGH
As of July 1, 2014, the city's pension is 71% funded with an unfunded liability at a sizable $168 million (2.9% of market value) using the plan's above-average 8.2% discount rate. Using Fitch's more conservative 7% discount rate assumption, the pension is a low 63% funded. Prior to the issuance of POBs, the funded ratio had gotten as low as 6.7% in 2004. The city fully funded its ARC of $16.1 million in fiscal 2014 and $16.6 million in fiscal 2015.

The city's OPEB liability is estimated at a very high $988 million (17% of MV) as of July 1, 2014. In fiscal 2014 the city contributed $38 million for pay-go costs (53% of its ARC).

All non-police union employees hired after July 1, 2004 and police personnel hired after July 1, 2009 have had their OPEB benefits reduced, as they are now required to contribute 102% of the premium if they choose to maintain coverage post-retirement. The city has taken steps to control escalating healthcare costs including the audit of dependent eligibility, bidding out its third-party administrative services, and changing coverage to a high deductible plan. The next OPEB valuation is projected to show a notable decline but still-high outstanding liabilities as a result of these actions.

Total carrying costs for debt service, pension ARC, and OPEB pay-go is a moderate 18.5% of fiscal 2014 total governmental spending.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

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 William Blair & Co., bond Underwriter.

Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993396
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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
Amy Laskey
Managing Director
+1-212-908-0568
or
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@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
Amy Laskey
Managing Director
+1-212-908-0568
or
Sandro Scenga, New York, +1 212-908-0278
sandro.scenga@fitchratings.com