Fitch Affirms Madison, (CT)'s GOs at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Madison, Connecticut's (the town's) obligations as follows:

--$10.7 million general obligation (GO) bonds at 'AAA'.

In addition, Fitch has affirmed the town's Issuer Default Rating (IDR) at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the town secured by its full faith, credit, and unlimited taxing authority.

KEY RATING DRIVERS

The 'AAA' IDR and GO rating reflects Fitch's expectation the town will maintain a high level of financial flexibility during economic cycles through a combination of expenditure controls and budget management. Fitch believes that these credit positives will sustain the town's strong financial profile.

Economic Resource Base

The town of Madison is located on the Long Island Sound, approximately 15 miles east of New Haven and 35 miles south of Hartford. The town is primarily residential, comprised in part of seasonal residents, with a population of 18,223 that has remained relatively flat since the 2000 census.

Revenue Framework: 'aa' factor assessment

General fund revenue growth has historically been strong, exceeding both U.S. GDP and CPI. Fitch expects future revenue growth to remain solid reflecting property value appreciation and modest economic development. Revenues primarily derive from property taxes. Local governments in Connecticut have an unlimited taxing authority.

Expenditure Framework: 'aa' factor assessment

Fitch expects the natural pace of spending growth to be in line with to slightly above natural revenue growth. Carrying costs associated with debt service and retiree costs are low, and management maintains adequate control over wages and benefits in labor contracts due to an advantageous conflict resolution process. In fiscal 2018 general spending will be limited by a state imposed 2.5% cap, though exemptions exist for some items, including debt service.

Long-Term Liability Burden: 'aaa' factor assessment

Fitch anticipates liability levels to increase, though still remain relatively low, given the town's proposed debt needs. Debt and net pension liabilities are slight at 2.4% of personal income. The town's three pension plans are closed to new hires, and management fully funds actuarially determined contributions.

Operating Performance: 'aaa' factor assessment

Fitch expects the town to maintain balanced operations through an average economic downturn due to its superior budgetary flexibility. Active budget management practices, as exhibited this past fiscal year following state budget cuts, enhance the town's overall operating performance.

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

Madison is primarily a residential community drawing a large number of summer residents and visitors to its parks and beaches. Residents commute to professional positions in nearby cities, while local employment largely centers on retail and service establishments oriented toward residents and tourists.

Madison's socio-economic profile is strong, characterized by wealth levels well above U.S. and state levels, and unemployment typically below national averages.

Revenue Framework

The town's general fund revenues primarily derive from its property taxes, representing roughly 87% fiscal 2015 general fund revenues. Intergovernmental revenues, which have been subject to recent cuts, comprised 11% of revenues. Management has an unlimited independent legal ability to raise taxes, and has typically adjusted its tax rate annually to offset changes in the taxable grand list.

Fitch expects future revenue growth to be above the level of inflation, reflecting housing market appreciation and modest economic development. Housing values rose 1% over the past 12 months, according to the Zillow Group, and are projected to increase 0.8% over the coming year.

Historical general fund revenue growth has exceeded both U.S. GDP and CPI. The town's first property assessment since the Great Recession, performed on Oct. 1, 2013 and effective fiscal 2015, resulted in a 17.3% reduction in taxable value. The State of Connecticut requires a reassessment of property values every five years. Between valuations tax base changes only reflect increases in value due to property improvements or new additions, they do not reflect a change in values as a result of a sale of property.

Municipalities in Connecticut have independent legal ability to raise property taxes by state constitution.

Expenditure Framework

The town's general fund expenditures are mainly driven by educational costs, which represented over two-thirds of fiscal 2015 expenditures.

Short of policy action, Fitch expects the town's pace of spending to remain in line with to marginally above revenue growth. The fiscal 2017 budget projects a 2.6% increase from the year prior, the bulk of which is due to a 20% rise in health insurance costs.

Fixed carrying costs for debt service, pension and OPEB are low at 7.7%. Madison is able to cut some miscellaneous general fund expenditures, but maintains more significant flexibility in reducing consistent pay-go spending on capital projects. In fiscal 2017 $3.2 million is budgeted as an appropriation to the capital project fund. Management holds moderate control over its workforce. Union contracts are subject to arbitration, but a decision may be rejected by a two-thirds vote by the town's legislative body, and final decisions are required to take into consideration the financial capability of the employer.

State legislation passed last year will limit annual spending increases to 2.5% or the rate of inflation, whichever is greater. The legislation will be effective fiscal 2018. The cap excludes expenditures for debt service, special education, court orders, arbitration awards and national disasters given a declared state of emergency. Municipalities that increase their general fund budget above the cap will receive a reduced municipal revenue sharing grant, lowered to 50 cents for every dollar spent above the cap. Fitch does not believe it will have a notable impact on its financial operations; Madison is projected to receive roughly $88 thousand from the municipal revenue sharing grant in fiscal 2017.

Long-Term Liability Burden

Madison's long-term liability burden is low relative to its economic resource base, with unfunded pension liabilities and direct debt totaling just 2.4% of personal income. Management is considering a $9 million bond issuance for local library renovations early next year, though a similar plan was rejected by voters in a 2008 referendum. Fitch would not expect this issuance to pressure the 'aaa' long-term liability assessment given the town's manageable debt service schedule.

Madison maintains three single-employer defined benefit pension plans covering substantially all of its eligible employees, except teachers covered by the State of Connecticut Teachers' Retirement Fund. The town's pension plans are funded at 72.5% based on the Fitch-adjusted 7% investment rate of return, resulting in a net pension liability of $9.3 million. Effective 2016 all three plans were closed to new hires; employees hired subsequently participate in a defined contribution plan.

The town's OPEB plan is closed to new town employees, and school employees receive an implicit rate subsidy. The plan's unfunded liability was a manageable $17 million as of Jan. 1, 2015, at 1.2% of personal income and 0.4% of market value. The town continues to fund its obligation on a pay-as-you-go basis.

Madison continually builds its capital reserve fund ($7.6 million, fiscal 2015) in order to limit the need for bonding. The fiscal 2017 to 2021 five-year capital improvement plan (CIP), which totals approximately $34.1 million, will be funded in half by the capital reserve fund. Another one-third of the CIP incorporates the proposed bond issuance for the library, with the remainder funded through grants and donations.

Operating Performance

The Fitch Analytical Sensitivity Tool suggests the town may experience modest revenue losses in a moderate recession. Given the town's high level of fundamental financial flexibility, Fitch expects that Madison will continue to maintain balanced operations and demonstrate financial resiliency. Fitch also notes the town's commitment to maintaining unrestricted reserves above its policy level of 10%, further augmenting available resources to manage through a period of economic stress.

Madison has demonstrated a strong commitment to enhancing its financial flexibility. Budgeting is conservative, and management has been proactive in maintaining operational balance throughout economic cycles. The town has been able to reduce its tax rate in times of economic recovery, though has raised it more recently in order to fulfill expenditure needs.

In fiscal 2015 Madison posted an operating surplus of $553 thousand after transfers, resulting in a solid unrestricted fund balance of $10.8 million, or 13.1% of spending. During fiscal 2016 management imposed a spending freeze in response to impending cuts in state aid, which amounted to roughly $1.3 million in savings and contributed to an unaudited surplus (after transfers) of roughly $1.4 million. Given the larger than expected surplus, management decided to lessen the mill rate increase for fiscal 2017.

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

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478

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Contacts

Fitch Ratings
Primary Analyst:
Rachel Grossman, +1-646-582-4967
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Nicole Wood, +1-212-908-0735
Director
or
Committee Chairperson:
Barbara Ruth Rosenberg, +1-212-908-0731
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Rachel Grossman, +1-646-582-4967
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Nicole Wood, +1-212-908-0735
Director
or
Committee Chairperson:
Barbara Ruth Rosenberg, +1-212-908-0731
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com