NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following Town of Fairfield, Connecticut (the town) general obligation (GO) bonds:
--$20,311,000 GO bonds, Issue of 2016, series B.
Fitch also assigns a rating of 'F1+' to the town's $20,432,000 GO bond anticipation notes (BANs), series 2016.
The bonds and BANs are scheduled to sell competitively on July 5. Proceeds will be used to finance and refinance general purpose and school projects.
In addition, Fitch affirms the following ratings:
--Approximately $165 million outstanding GO bonds at 'AAA';
--the town's Issuer Default Rating (IDR) at 'AAA'.
The Rating Outlook on the long-term ratings is Stable.
SECURITY
The bonds and BANs are backed by the full faith and credit and unlimited taxing power of Fairfield.
KEY RATING DRIVERS
The 'AAA' IDR and GO ratings reflect Fitch's expectation for the town of Fairfield to maintain exceptional financial flexibility throughout economic cycles, consistent with a history of strong operating performance, revenue base stability and sound reserves. The town's strong financial profile reflects a wealthy property tax base, modest expenditure growth demands and a demonstrated ability to reduce expenditures during economic downturns. Fitch expects long-term liabilities to remain low based on manageable capital needs and well-funded town-managed pension plans.
Economic Resource Base
Fairfield is an affluent residential community located in Fairfield County along the Long Island Sound between Bridgeport and Norwalk. It has an estimated 2015 population of 61,523 which is up 3.6% since 2010.
Expected Market Access: The 'F1+' short-term rating reflects the strong credit characteristics of the town and Fitch's expectation for strong market access.
Revenue Framework: 'aaa' factor assessment
Fairfield's revenues had a compound annual growth rate of 5.3% over the period of fiscal 2004 through fiscal 2014, exceeding both U.S. GDP and CPI for the same period. Growth in revenues was derived from a combination of tax rate increases and tax base growth. Fitch expects more moderate but still solid revenue growth without tax increases reflective of an improvement in housing values, a moderate level of new improvements underway, and the town's generally strong economic underpinnings associated with its outstanding school system and desirable location. Local governments in Connecticut have an unlimited taxing authority.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth is expected by Fitch to be in line with to slightly above natural revenue growth over time. Carrying costs for long-term liabilities claim a moderate proportion of governmental spending. The town has adequate controls over employee headcount and wages, and has demonstrated the flexibility and willingness to cut spending during economic downturns.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch anticipates Fairfield's long-term liability burden to remain low based on a manageable capital plan and history of full funding of its pension actuarially determined contribution (ADC). The town's debt and adjusted unfunded net pension liabilities are low at 6.6% of personal income.
Operating Performance: 'aaa' factor assessment
Fitch expects the town to manage through periods of economic decline while maintaining a sound financial cushion on the basis of its superior level of budgetary flexibility and history of careful financial management throughout the economic cycle.
RATING SENSITIVITIES
STRONG MANAGEMENT PRACTICES: The rating is sensitive to shifts in the town's strong financial management practices and maintenance of fundamental financial flexibility.
CREDIT PROFILE
Many of the town's residents are professionals or executives who work in New York City or at industrial and corporate headquarters of firms located in town or surrounding Fairfield County communities. Additionally, the town is home to Fairfield University and Sacred Heart University. Income and wealth levels are very high and Fairfield's unemployment rate is consistently below state and national levels.
General Electric Company, whose corporate headquarters are located in Fairfield, announced in January 2016 that it would be relocating its corporate headquarters from Fairfield to Boston. GE's Fairfield office houses approximately 800 employees who live throughout Fairfield County. According to town management, 200 of those employees will be transferred to Boston, and over the following two to three years, the other 600 employees will be transferred to other GE facilities within Connecticut. A sale of the property is expected upon completion of the relocations. GE pays approximately $1.6 million in property taxes annually which equates to a modest 0.6% of the total fiscal 2016 tax levy. Fitch does not expect the relocation of GE and pending sale of its headquarters building to cause a negative impact on the town's financial operations.
Fairfield's tax base is subject to five-year revaluations. After increasing 60% following the Oct. 1, 2005 revaluation, the 2010 revaluation resulted in a 10% decline and the Oct. 1, 2015 revaluation (effective for fiscal 2017) resulted in an additional 2% decrease. Zillow.com reported a 4.6% annual increase in home values year over year through May 2016 as sale activity for homes priced below $1 million has been active. Building permit values have ranged from between $130 million to $169 million the last four years. The fiscal 2017 estimated market value of $15.4 billion is equivalent to a very high $250,000 per capita.
Revenue Framework
The town's primary source of revenues is derived from property taxes representing approximately 86% of fiscal 2016 budgeted revenues. Management has an independent legal ability to raise taxes without limit and has made regular increases in its tax levy as needed to meet expenditure growth. State aid has been subject to cuts recently but represents only approximately 3% of fiscal 2015 operating revenues.
Fitch expects moderate tax base growth to yield continued solid revenue growth without increases in tax rates or other revenue enhancements based on the level of building permits approved and improving housing values.
Expenditure Framework
Fairfield's spending is primarily for education and town employee salary and benefits and management has kept growth in these costs at a moderate level. Fixed costs for debt service, pension and other post-employment benefits (OPEB) represent a moderate 13% of fiscal 2015 spending. The town makes 100% of its actuarially calculated contribution towards its OPEB costs and the board of education makes annual pay-as-you-go contributions.
Expense growth is expected by Fitch to be moderate and generally in line with revenues to slightly above without policy action.
The town has the ability to reduce expenses tied to its services. Management has the ability to reduce non-public safety staff at any time if necessary. Union contracts are subject to arbitration but a decision may be rejected by a two-thirds vote by the town's legislative body. Arbitration decisions are required to take into consideration the financial capability of the employer.
Long-Term Liability Burden
Long-term liabilities for debt and unfunded pensions represent a low 6.6% of personal income. Fitch expects liability levels to remain low given the town's moderate borrowing plans and its commitment toward full funding of its annual pension contribution. Additionally, debt amortization is rapid with 76% of principal paid off over 10 years.
The town's two pension plans are funded at a Fitch-adjusted 87% using a 7% investment return rate and the aggregate estimated net pension liability, based on this return, is $51 million as of June 30, 2015. Overall net debt of $202 million compared to fiscal 2017 market value is low at 1.3%.
Management has established an OPEB trust for non-educational employees and such trust had a balance of $21 million at July 1, 2014. The unfunded OPEB liability for town and school board employees was a manageable $131 million as of the July 2014 valuation.
Operating Performance
Fitch expects the town will continue to maintain sound reserve levels throughout economic cycles given its historically stable revenue performance, superior inherent budget flexibility, and demonstrated commitment to maintaining reserves at its newly revised policy level of 8.5%-11% of budgeted expenditures.
The town has experienced steady growth in revenues largely driven by consistent moderate increases in the property tax rate that have supported surplus operations over the past five fiscal years and a buildup of reserves. At fiscal-end 2015, general fund balance improved by $3.1 million reflecting better than expected delinquent property tax collections, higher building permit revenues and $338,000 in insurance proceeds. There also was a budgeted contribution to fund balance in the amount of $500,000 as part of the town's plan to increase fund balance to meet its new policy level. The unrestricted general fund balance of $25.1 million represents 8.4% of GAAP spending, which includes state support for teachers' pension contributions.
Projections for fiscal-end 2016 reflect another net operating surplus of approximately $2.5 million including a budgeted $650,000 increase in fund balance. The surplus results reflect positive revenue variances mostly from better than anticipated tax collections and conservative spending estimates.
Fairfield's fiscal 2017 budget of $293.5 million is up 0.79% from the prior years' budget. The bulk of the increase is for education which is up 1.5%. The budget includes a $550,000 contribution towards fund balance.
The state of Connecticut enacted cuts to municipal and education aid programs after the town's fiscal 2017 budget was approved. Fairfield is projecting a cut in aid of approximately $2.6 million from the prior year's levels but it had included an increase in state aid of $1 million in its fiscal 2017 budget, resulting in a total $3.6 million gap for the coming year. Management has outlined a plan to address this gap including the encumbering of fiscal 2016 surplus monies related to unpaid expenses for that year of approximately $1 million-$1.5 million and the remainder to be addressed through operational savings and positive expense variances associated with conservative budget estimates.
During the most recent downturn, the town demonstrated its ability to reduce spending through cost controls and staff reductions and Fitch expects management would take the same actions to maintain its strong financial resilience. At times of economic recovery, the town acts to bolster reserves.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
Rating U.S. Public Finance Short-Term Debt (pub. 17 Nov 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873508
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008147
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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