Fitch Upgrades Tolland, CT's GO Bonds to 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following Town of Tolland, CT general obligation (GO) bonds to 'AAA' from 'AA+':

-- Approximately $30 million outstanding GO bonds, series 2005, 2007, 2008, 2010, 2011, 2012A, and 2012B.

In addition, Fitch has upgraded Tolland's Long-Term Issuer Default Rating (IDR) to 'AAA' from 'AA+'.

The Rating Outlook is Stable.

SECURITY

The bonds are backed by the town's full faith and credit and unlimited taxing authority.

KEY RATING DRIVERS

The upgrade of the GO rating and IDR to 'AAA' reflects the application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. The ratings reflect the town's low long-term liability burden and exceptional financial operations, supported by high levels of revenue-raising authority and solid expenditure flexibility, which position it to withstand the challenges associated with a moderate economic downturn.

Economic Resource Base

The town is a residential community located in central Connecticut about 20 miles northeast of Hartford, the state capital. The town's tax base has contracted in recent years due to housing market declines; however, housing market fundamentals appear to be strengthening and resident wealth and employment metrics compare favorably to state and national averages.

Revenue Framework: 'aa' factor assessment

Fitch expects growth prospects for revenues to fall below historical growth levels, reflective of weak post-recession tax base appreciation, and generally track the level of inflation going forward. The bulk of operating revenues are derived from property taxes levied on a predominantly residential and affluent tax base. There is no limit to the property tax rate or levy.

Expenditure Framework: 'aa' factor assessment

The vast majority of the general fund budget pays for schools. Future spending growth is expected to mirror revenue performance, and a state-wide cap on spending growth will likely provide additional spending restraint. Fixed carrying costs are very low and management maintains moderate control over wages and benefits in labor contracts, providing solid expenditure flexibility.

Long-Term Liability Burden: 'aaa' factor assessment

The town's long-term liability burden represents a very modest share of resident personal income, owing to conservative debt management and minimal retiree benefit obligations.

Operating Performance: 'aaa' factor assessment

Generally conservative budgeting and steady, moderate tax rate increases have allowed revenues to keep pace with spending growth yielding very stable financial results and modest operating surpluses. Reserves have been consistently maintained within the town's prudent formal fund balance target between 8% and 17% of spending, a more than sufficient reserve cushion relative to scenario-estimated revenue volatility.

RATING SENSITIVITIES

Management Practices: Fitch expects the ratings to remain stable in the absence of a shift in management practices and/or policy and resultant weakening of the town's long-term operating profile.

CREDIT PROFILE

The town is a primarily residential community located in central Connecticut about 20 miles northeast of Hartford. Its 2015 population of 14,849 is up 13% since 2000 with modest declines in recent years. Tolland is seven miles from the University of Connecticut's (UConn) flagship campus at Storrs, and within commuting distance of metropolitan Hartford.

Revenue Framework

Property taxes are the town's main source of revenue, making up 70% of general fund revenues. State municipal aid accounts for the bulk of remaining general fund sources and is subject to periods of volatility linked to state budgetary pressures and policy action. The natural pace of revenue growth was strong over the last decade, though future prospects are more tepid given the town's near fully-developed status and limited population growth. Limited growth prospects are somewhat offset by unlimited revenue-raising authority.

The town's tax base has grown at an average annual rate of 4.6% between fiscals 2005 and 2014. The most recent revaluation (effective fiscal 2016) reflects a 3.5% drop linked to post-recessionary housing and commercial property value declines. Given this softening in tax base performance and new construction activity, Fitch does not expect near-term tax base growth to outpace inflation but rather continue to expand at a pace consistent with post-recessionary levels.

The town has independent legal ability to raise property taxes without limit. The annual budget is subject to voter approval, but proposals are presented on an appropriation basis, thereby ensuring sufficient revenues to meet voter-approved spending levels, and the town has a history of smooth budget approval.

Expenditure Framework

The town is responsible for the provision of public education, the cost of which is funded by a combination of local contributions and state aid. Spending growth has been manageable and the enactment of state legislation in fiscal 2018 is likely to further limit future spending growth. Low carrying costs and moderate control over labor costs provide a solid level of spending flexibility.

The bulk of the town's spending is related to education (73% of general fund expenditures) followed by public works (8%). Total spending has increased at a manageable pace in recent years and the town targets annual spending growth below 3%, maintaining alignment with revenue performance. Future spending will likely continue in line with revenues.

The town maintains a solid level of spending flexibility, owing largely to low debt and retiree benefit costs at 8% of governmental spending. The metric is almost entirely driven by debt service and incorporates the town's aggressive approach to debt repayment (close to 90% of principal is repaid within 10 years). Pension costs are limited to the town's contribution to a defined contribution pension plan for general employees. Other post-employment benefits (OPEB) spending is also minimal. The low carrying cost metric is somewhat offset by more limited spending flexibility related to education and personnel. Union contracts are subject to arbitration but a decision may be rejected by a two-thirds vote by town council. 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.

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 expects to be able to keep expenditure growth within this cap based upon recent years' performance.

Long-Term Liability Burden

The town's long-term liability burden represents a very modest share (3.6%) of resident personal income. Liabilities are constituted entirely of the town's rapidly amortizing direct debt obligations. The town's conservative debt management practices and limited capital needs indicate that the burden will remain stable or decline in future years. The town does not manage any defined benefit pension plans for general employees, instead funding a defined contribution plan at 6% of payroll. OPEB does not represent a major burden on the local resource base.

Operating Performance

The town has maintained a high level of financial resilience, with reserves comfortably above Fitch's safety margin for a 'aaa' assessment, sufficient to weather the simulated revenue decline in a moderate economic downturn scenario. The town's superior level of inherent budget flexibility is representative of solid spending flexibility and unlimited revenue-raising authority.

Reserves levels remained strong throughout the recession, and the town has continued adding to its financial cushion with several years of modest surpluses. Reserves equaled an ample 14.7% of spending in fiscal 2015, and fiscal 2016 (unaudited) figures indicate a modest surplus of approximately $300,000 (less than 1% of spending). The fiscal 2017 budget projects a modest draw of approximately $230,000 from unrestricted fund balance, mostly related to the filling of positions held vacant since the recession. The town has historically maintained reserves at the upper end of its target fund balance range of 8% to 17% of general fund spending and expects to remain at this level in future years.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's 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, Inc.
Primary Analyst
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Associate Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
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Director
or
Committee Chairperson
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Senior Director
or
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
George Stimola, +1-212-908-0770
Associate Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kevin Dolan, +1-212-908-0538
Director
or
Committee Chairperson
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com