NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AAA' rating to the following general obligation (GO) bonds to be issued by the city of Summit, NJ (the city):
--$9,955,000 general bonds of 2016;
--$845,000 assessment bonds of 2016;
--$4,071,000 sewer bonds of 2016;
--$1,161,000 parking bonds of 2016;
--$13,800,000 school bonds of 2016.
The bonds will be sold via competitive sale on April 6th. Proceeds will be used for various city and school improvements and redeem outstanding bond anticipation notes and temporary notes maturing April 22, 2016.
In addition, Fitch affirms the 'AAA' rating on approximately $80 million of outstanding GO bonds of the city.
The Rating Outlook is Stable.
The bonds are a general obligation of the city payable from the levy of ad valorem taxes on all taxable property in the city without limitation as to rate or amount. The school bonds are additionally secured by the New Jersey School Bond Reserve Act.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: Management continues to use prudent budget practices and comply with its fiscal policies, resulting in historically stable operating results and maintenance of solid reserve levels.
ABOVE-AVERAGE DEMOGRAPHICS: Resident education and income measures are exceptionally strong. High-priced residential properties comprise the city's fairly stable tax base.
PROXIMITY TO LABOR MARKETS: Numerous employment opportunities are located in the city and within commutable distance to the greater New York City marketplace.
MODERATE DEBT LEVELS: Debt ratios are moderate overall and amortization is rapid. Manageable capital needs should result in debt levels that do not change materially over time. Annual carrying costs for debt, pension, and other post-employment benefits (OPEB) are not disproportionate as a percent of budget.
CHANGES IN FINANCIAL CONDITION: Fitch expects Summit's financial operations to remain relatively stable with a continued maintenance of sound reserves. Performance contrary to these expectations could cause a change in the rating or Rating Outlook.
Summit is located about 25 miles west of downtown Manhattan and covers a total land area of 6 square miles in northwest Union County. It has an estimated 2013 population of 21,998.
AFFLUENT RESIDENTIAL COMMUNITY PROXIMATE TO NYC
The city is proximate to several interstate highways and mass transit options, offering access to employment markets throughout the NYC metropolitan area. Summit is a mature community, with less than 1% of its land area classified as developable vacant land. Residential properties represent 81% of the city's tax base and homes are highly priced with median home values at $778,000 according to Zillow. Fitch estimates the city's market value in excess of an extremely high $300,000 per capita. Resident's educational attainment and income are considerable - 31% of the adult population holds an advanced degree, three times the national standard, and median household income of over $120,000 is approximately 170% and 230% of the NJ and U.S. benchmarks, respectively.
Employment data are not available for the city given its small population. Union County's December 2015 preliminary unemployment rate of 4.6% is slightly higher than the New Jersey rate of 4.3% but below the nation's 5% rate.
The medical sector contributes notably to the city's employment base. Overlook Medical Center, a general medical and surgical hospital and member of the Atlantic Health System, is the largest employer in the city (3,119). The biopharmaceutical company Celgene purchased the vacant Merck & Co.'s Summit campus in October 2015. Celgene will occupy this facility in addition to its headquarters campus also located within the city.
The city's assessed values of $3.1 billion decreased 0.55% in 2015 after increasing by a similar aggregate amount over 2013 and 2014.
The assessed value for the property formerly owned by Merck was reduced by approximately $40 million after the Celgene purchase, according to city officials, but new tax base growth is estimated to significantly offset the devaluation in the calculation of the 2016 tax roll.
Fitch expects assessed values to experience only modest growth over the near term based on projected improvements in housing values and various commercial/housing projects planned or underway in the city.
HEALTHY FINANCIAL PROFILE
Results for 2014 were positive and resulted in a current fund balance increase for the fourth consecutive year to $10.1 million. Fund balance is a healthy 28% of municipal spending (adjusted for the pass-thru of county, school and district taxes). Liquidity is adequate with current fund cash and investments at the end of 2014 totaling $14.6 million or 40% of the 2014 municipal-only spending. The city's reserve policy requires $1.6 million-$2 million of 'free' surplus, defined as the difference between the total fund balance and the amount of fund balance appropriated to balance the subsequent year's budget.
For 2015, management increased appropriated fund balance to $7.6 million from $6.4 million in 2014 to help absorb the reduction in tax revenues (approximately $334,000) as a result of the closure of the Merck campus as well as start-up costs associated with a new joint emergency services dispatch center. The city did not increase the tax rate in 2015. Unaudited results for 2015 reflect a decline in fund balance to $9.6 million as a combination of lapsed reserves, a sale of assets and strong overall tax collections of over 99% resulted in only a $503,000 use of appropriated fund balance.
Property taxes for municipal budget purposes represent roughly 78% of current fund operating revenue (net of appropriated fund balance). Tax collections are excellent, averaging 99.7% over the prior five collection years. The annual tax levy is subject to a 2% cap (plus increases in the tax base from new construction). However, the tax cap law includes several important exclusions for capital expenditures, debt service, and increases in pension contributions and health care costs in excess of 2%, and extraordinary costs related to declared emergencies. State law also restricts growth in municipal appropriations and increases in base salary awarded through arbitration that mitigate risk associated with constraints on the city's revenue-raising authority.
The 2016 budget proposal is being presented to city council on April 5th. Preliminary estimates suggest a moderate increase in general operating expenses, including a 5.8% increase in health insurance and modest increase in pension contributions. No material changes are anticipated in the 2016 budget compared to last year.
MODERATE DEBT RATIOS; RAPID AMORTIZATION
Fitch estimates Summit's overall debt burden at a slightly high $6,032 per capita but a low 1.9% of market value. A material change in debt ratios is not expected, as future debt plans are manageable and the city's debt amortizes at a very rapid rate of 91% over 10 years. Municipal debt service charges in 2015 (excluding school debt) were budgeted at $3.07 million or an affordable 7% of spending.
PENSION BENEFITS OFFERED THROUGH STATE PLAN
City employees and retirees participate in the state administered Police and Firemen's Retirement System (PFRS) or the Public Employee's Retirement System (PERS). The funded status of the PFRS and PERS local portions was 76% and 74% respectively, as of June 30, 2014. Using Fitch's 7% investment rate of return, the funded levels decline to an estimated 69% and 67%, respectively. Unlike the state portion of PFRS and PERS, the aggregate contributions to the local portion of the plans have been equal to the actuarial required contribution. Summit's contributions paid in 2014 totaled $2.9 million or 8% of spending and $2.95 million was budgeted for 2015. City OPEB liabilities are limited to very small annual stipends. Carrying costs for debt service, pension and OPEB were a manageable 16.6% of 2014 municipal spending.
Additional information is available at www.fitchratings.com
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include 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 in the beginning of the second quarter of 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 the applicable criteria specified below, this action was informed by information from CreditScope and Lumesis.
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form