Fitch Upgrades Guilford, CT IDR and GOs to 'AAA', Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following ratings on the town of Guilford, Connecticut (the town):

-- Long-Term Issuer Default Rating (IDR) to 'AAA' from 'AA+;'

-- $13.5 million GO bonds, series 2012A to 'AAA' from 'AA+';

-- $23.4 million GO bonds, series 2014 to 'AAA' from 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the town and are backed by the town's full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

The upgrade reflects a combination of positive credit trends and the application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016, which incorporate a more focused consideration of the adequacy of an issuer's reserves and the use of scenario analysis in the rating process. The 'AAA' IDR and GO ratings reflect the town's exceptionally strong gap-closing capacity, positive prospects for revenue growth, and solid operating performance. The town's strong financial profile reflects a wealthy property tax base, and manageable expenditure growth. Fitch expects long-term liabilities to remain low based on manageable capital needs and well-funded pension plans - which are closed to new entrants.

Economic Resource Base

The town of Guilford is an affluent residential community located in New Haven County about 90 minutes north of New York City. The town benefits from a large healthcare presence and its proximity to several colleges and universities, including Yale. The town's 2015 population of roughly 22,350 has been stable for the past five years.

Revenue Framework: 'aa' factor assessment

Property taxes are the primary sources of revenues for the town. Fitch expects revenue performance to be solid, reflecting property value appreciation and new development. The town has unlimited taxing authority.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected to be close to or marginally above that of revenue. The town derives spending flexibility from low carrying costs associated with debt service and retiree-related expenditures. The town maintains adequate control over staffing, wages and benefits.

Long-Term Liability Burden: 'aaa' factor assessment

Fitch expects the town's long-term liability profile to remain low based on a manageable capital plan and well-funded pension plans.

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 budget flexibility.

RATING SENSITIVITIES

Financial Flexibility: The rating is sensitive to material shifts in the town's strong financial management practices and its fundamental financial flexibility.

CREDIT PROFILE

Many residents of the town work in nearby cities such as Hartford, New Haven and New London. Over one-third of the town's labor force works in healthcare, professional services, educational services, scientific and management. This highly educated labor forces drives the town's strong performance in wealth and employment indicators; the unemployment rate consistently trends below state and national averages, and wealth indicators are well-above national averages. Market value per capita is a high $197,000 based on the town's fiscal 2017 market value of $4.4 billion.

Revenue Framework

Property taxes represent the bulk of general fund revenues for the town, at approximately 87% of fiscal 2015 general fund revenues. The town has adjusted the millage rates as needed to reflect tax base changes and expenditure needs.

Fitch expects tax base growth to be above the level of inflation over time, reflecting housing market appreciation and some new development. According to Zillow.com, housing values are forecast to increase a little over 2% over the next year, following growth of 3.5% (August 2015 to August 2016). The grand list is revalued every five years with minimal changes in between for property improvements, new construction or tax appeals, but not the results of sales of property. The most recent revaluation effective fiscal 2015 (calendar year 2013) reflected some post-recessionary loss of about 13%. The next revaluation is in 2018 and will be effective for fiscal 2020.

The town has the independent ability to raise taxes without limit and has made increases in its tax levy when needed to meet expenditure growth.

Expenditure Framework

The bulk of the town's general fund spending responsibility is for education (approximately 67%), followed by public safety at approximately 9% of fiscal 2015 general fund expenditures.

Fitch expects the natural pace of spending growth to be match or marginally exceed revenue growth.

The town maintains a solid level of expenditure flexibility. Fixed carrying costs for debt service, pension and OPEB are low at approximately 5% of governmental spending in fiscal 2015. The town's payments to two of its three pension plans exceeded the actuarially determined contribution for the past three years, signaling enhanced expenditure flexibility.

The town has adequate control over staffing, wages, and benefits. Management has the ability to reduce 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 board of selectmen. A new arbitration panel would then be appointed by the state and their subsequent decisions are required to take into consideration the financial capability of the employer.

The town maintains additional flexibility due to its pay-as-you-go capital funding, budgeted for $951,000 in fiscal 2017, as well as $110,000 budgeted towards various reserve accounts.

State legislation was passed last year imposing a 2.5% cap on local governments' general spending growth budgets beginning in fiscal 2018. The cap limits annual increases to 2.5% over the spending level for the previous fiscal year, or the rate of inflation, whichever is greater. The cap excludes expenditures for debt service, special education, court orders and arbitration awards. There is an exception for major disasters provided there is a presidential or gubernatorial declaration of emergency. Towns and cities that increase their general budget expenditures over the previous fiscal year by an amount that exceeds this cap receive a reduced municipal revenue sharing grant. The reduction is equal to 50 cents for every dollar the local government spends over the cap. Management is projecting it will receive $107,734 (less than 1% of budgeted general fund revenues) from this grant in fiscal 2017. Fitch does not believe it will have a notable impact on its financial operations based on the town's historically stable operating results and conservative budget practices and limited reliance on state revenue sharing grants.

Long-Term Liability Burden

Long-term liabilities for debt and unfunded pensions represent a low 6.4% of personal income. The town has no overlapping debt. Amortization of debt is slightly above average, at about 52% of principal retired in 10 years. Fitch expects liability levels to remain low given the town's moderate borrowing plans which include $25 million of GO bonds through fiscal 2021 according to the fiscal 2017-2021 capital improvement plan.

The town maintains three pension plans - the employees' pension plan, the police retirement fund, and the public school employees' (noncertified) pension plan, that are closed to new entrants. Using GASB 68 reporting, the combined ratio of assets-to-liabilities at June 30, 2015 was 94.3% using the town's 7% discount rate assumption. The town's contributions to the employee's pension plan and the police retirement fund have exceeded the actuarially determined contribution (ADC) for at least the past three years.

The Board of Education teachers participate in the State Teacher's Retirement System, a cost-sharing pension plan, for which the state is solely responsible for all contributions.

Operating Performance

Fitch believes the town is exceptionally well-positioned to manage the challenges associated with a moderate economic downturn while maintaining a high degree of financial and budgetary flexibility. The town's low carrying costs, revenue raising abilities, and solid control over expenditures afford the town substantial gap-closing capacity.

The town has improved financial flexibility since the last recession, evidenced by the town replenishing its general fund reserves for six consecutive years. The town ended fiscal 2015 with a $1.1 million operating surplus (1.1% of spending), increasing unrestricted reserves to $8.5 million or 8.9% of spending.

Because of positive revenue variances and expenditure control, management is estimating another positive year of general fund operations in fiscal 2016, increasing total general fund reserves to about $10.8 million. The fiscal 2017 adopted budget totals about $93.2 million (about a 2.7% increase over the prior year), and is balanced without the use of fund balance. The fiscal 2017 budget includes a 1.5% increase in the millage rate to 28.67.

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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012784

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Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Director
+1-212-908-0538
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan
Director
+1-212-908-0538
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com