NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A-' rating to the following city of New Haven, CT's (the city) general obligation (GO) bonds:
--$53,800,000 GO refunding bonds, series 2015B.
The bonds are being issued to refund a portion of the city's outstanding GO bonds. Bonds will be sold via negotiation on or around December 9.
In addition, Fitch affirms its 'A-' rating on the city's approximately $562 million in 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 power.
KEY RATING DRIVERS
LIMITED FINANCIAL FLEXIBILITY: A modest increase in reserves is projected for fiscal 2015, although reserve levels remain very low. Expenditures tied to education, employee salaries and benefits continue to pressure the budget. These costs, along with annual debt service, are expected to continue to increase and limit overall financial flexibility. Recent state legislation that provides for new revenues to the city in fiscal 2017 is expected to relieve some of this pressure.
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.
LARGE 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 should generate tax base growth.
BELOW-AVERAGE WEALTH LEVELS: Wealth levels continue to trend below state and national averages. Unemployment rates have improved with growth in the number of jobs but rates remain above state and national averages.
RATING SENSITIVITIES
STRUCTURAL BALANCE; RESTORATION OF RESERVES: Fitch expects the city to achieve and maintain structural balance in the near term and to gradually restore reserves to more adequate levels. Projections of tax base and state revenue growth and improved expenditure containment will be critical to these efforts and to maintaining the current rating.
CREDIT PROFILE
New Haven is located on the north shore of the Long Island Sound about 75 miles north of New York City. The city's population is estimated at 130,660 for 2013, up 5.7% since 2000.
BUDGET PRESSURES PRESENT FOR FISCAL 2016
Management reports that expenditures tied to self-insurance and overtime are exceeding expectations. In addition, state aid is projected to decline by $1.6 million based on the state's own budget pressures, and the city is facing a federal lawsuit brought on by certain of its fire employees regarding an incorrect calculation of overtime pay. The preliminary estimate of the city's potential liability is $1 million. The city plans to use approximately $5 million of upfront debt service savings derived from the series 2015B bonds to help plug these gaps.
Fitch does not consider the restructuring of 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 achieves net present value savings and does not result in an extension of existing bond maturities.
Management has indicated to Fitch that it is meeting more frequently with department heads to control overtime costs and has instituted a spending freeze for non-public-safety related items. Management is also reviewing capital project requests and may delay or cancel such items. On a positive note, parking and building permits continue to trend higher than budget, and tax collections are strong.
POSITIVE RESULTS EXPECTED IN FISCAL 2015
The total budget of $508 million was up roughly 2% over fiscal 2014 and included a 1.8% tax rate increase. No non-recurring revenues or one-time expenditure savings were included in the budget, similar to fiscal 2014. The budget originally included $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 reports that current projections show the city ending fiscal 2015 with a $1.7 million operating surplus and a corresponding increase in its unrestricted general fund balance. This balance is projected to remain less than 1% of spending.
Boosting these results are building permits exceeding budget by $7.5 million due to fees associated with new residential colleges for Yale University. Police and fire overtime costs continue to outpace budget but public safety outlays overall have declined due to the addition of new personnel in both the police and fire departments, which helped reduce overtime pressures. Medical benefit costs exceeded revenues by $3.5 million, but management used bond premiums derived from its summer bond sale to offset this deficit balance. Fitch expects management to develop a plan to eradicate future operating imbalances by the next fiscal year through increased revenues and through potential concessions to be negotiated with employee bargaining groups. Continued operational imbalances within the city's internal service funds could pressure the overall credit profile again.
FISCAL 2014 RESULTS SUPPORTED BY BOND RESTRUCTURING
City management took steps to erase its accumulated negative reserve balances and improve financial flexibility in fiscal 2014. The city had been carrying cumulative negative balances in the general fund after two consecutive fiscal years of deficit operations and also in its medical benefits and self-insurance funds as expenditures outpaced revenues.
Management responded by increasing revenues, securing concessions with bargaining groups and restructuring debt to generate upfront cash flow savings of approximately $15 million. The transfer of savings generated from a 2014 refunding were used to eliminate the accumulated fiscal end 2014 medical benefits fund deficit of $6.4 million and the remaining self-insurance fund deficit of $7.4 million.
Management's approval of a 2.27% increase ($11.1 million) in the property tax levy, combined with 1.5% growth in the city's 2012 grand list, resulted in additional revenues to close the projected fiscal 2014 budget gap of $12.3 million. Monitoring of departmental spending and the use of a portion of the refunding savings helped eliminate the negative $4.7 million accumulated general fund balance. Addressing the self-insurance fund deficit also freed up the non-spendable balance held in the general fund of $4 million. The general fund closed fiscal 2014 with a minimal balance of $22,047.
STATE LEGISLATION INCREASES CITY'S FUTURE PILOT REVENUES
The city expects to benefit from the state of Connecticut's recently approved legislation that boosts the payment in-lieu of tax (PILOT) payments provided by the state to municipalities with state-owned or tax-exempt college and hospital properties beginning in fiscal 2017. In addition, municipalities will now receive a share of state sales tax revenues beginning in fiscal 2016.
Pursuant to the legislation, New Haven is projected to receive in fiscal 2017 an additional $15 million in PILOT payments from the state. Beginning in fiscal 2018, the legislation establishes a new method for distributing the PILOT grants that is expected to help stabilize the distribution amounts going forward for municipalities. In addition, New Haven is expected to be in the highest of the three tiers established by the legislation.
The state of Connecticut's recent budget pressures could result in cuts to state municipal aid, although the timing and magnitude of any cuts remains unknown. Fitch will continue to monitor the state's response to its recent fiscal challenges, including any potential impact on its local governments.
ABOVE-AVERAGE DEBT BURDEN
Debt levels, net of state school construction reimbursements, are above average at approximately $4,185 per capita and 6.3% of fiscal 2016 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 (75% in 10 years). The five-year capital improvement plan (CIP) totals $234 million with anticipated annual borrowings averaging $35 million over the next five years.
WEAK PENSION FUNDING LEVELS
The city maintains two single-employer defined benefit plans for general city employees and police and fire personnel. Pension funded levels are low despite the city continuing to fund 100% of its ARC. The most recent actuarial valuation of July 1, 2014 showed the combined unfunded liability for both plans equal to $603 million (a high 6.9% of market value) and funded levels for the plans at 39% (general) and 50% (police and fire), using the plans' 8% assumed investment rate of return (IRR). Adjusting for Fitch's assumed 7% discount rate estimated funded levels are weaker at 35% and 46%, respectively.
The valuation was affected by several recent program changes, including a 0.25% reduction in the IRR to 8%, a change in the projected payroll growth rate from 4% to 2%, and a reset of the actuarial value of assets to market value effective July 1, 2014.
Pension costs represented a slightly elevated $41.3 million, or 5.8% of fiscal 2014 governmental spending. Pension costs increase to $45.9 million in fiscal 2016, partly due to the reduction in the IRR and a revision of the amortization of the unfunded liability to a fixed period - 30 years for the police and fire plan and 28 years for the general plan. Fitch expects annual pension costs to continue to climb due to the low funded status of the plans.
The city's unfunded OPEB liability was a high $441 million as of July 1, 2013, the most recent data available. The city contributed $24.5 million in fiscal 2014, equivalent to 64% of the ARC and 3.4% of fiscal 2014 total governmental spending.
Total combined carrying costs for debt service, pension contributions and OPEB pay-go represented a moderately high 18% of fiscal 2014 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 reportedly 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. Net taxable values declined a modest 0.4% for October 2014 as a result of successful appeals activity.
The city's unemployment rate remains elevated, but improved to 7.5% in August 2015, down from 9.1% a year prior as growth of 1.8% in labor occurred. Wealth levels are below state and national averages, as has historically been the case. The city's 2013 poverty rate is a very high 26.5% compared to the national average of 15.4%.
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, Zillow.com, and the National Association of Realtors.
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
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