NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the following Town of Bethel, CT general obligation (GO) bonds to 'AAA' from 'AA+':
--Approximately $1.6 million outstanding GO bonds, series 2009A and series 2009B.
In addition, Fitch has upgraded Bethel's Long-Term Issuer Default Rating (IDR) to 'AAA' from 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the town backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
The upgrade of the GO rating and IDR to 'AAA' reflects continued improvement in the town's financial performance and the application of Fitch's revised criteria for U.S. state and local governments, which were 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
Located in Fairfield County where employment growth has outpaced the nation, residents benefit from a diversity of local and regional job opportunities. The 2015 population was 19,529, representing 5% growth since 2007, and local employment base includes a mix of jobs in manufacturing, research, and services. The 10 largest employers are led by Ability Beyond Disability, Bethel Healthcare, and P&G Gillette.
Revenue Framework: 'aaa' factor assessment
Fitch expects growth prospects for revenues to fall modestly below historical growth levels, while still outpacing inflation, as the region generally trends favorably to national economic performance. The bulk of operating revenues are derived from property taxes levied on a predominantly residential and affluent tax base. There is no legal limit to the property tax rate or levy.
Expenditure Framework: 'aa' factor assessment
The 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 limited 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. The town's historically sound reserves have been bolstered significantly in recent years due to solid operating surpluses, providing 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 of Bethel is located in northern Fairfield County, Connecticut, one of the nation's wealthiest counties. Residents benefit from access to the labor market in south Fairfield County as well as New York City. The town's economic strength and advantageous location have fostered population growth comfortably above other Connecticut localities.
Revenue Framework
Property taxes are the town's main source of revenue, making up 80% 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 have moderated, given slowed tax base growth and limited developable land. The town retains unlimited legal property tax revenue-raising authority.
The town's tax base has grown at an average annual rate of 2.4% between fiscals 2005 and 2014. The most recent revaluation (effective fiscal 2014) reflects significant tax base contraction linked to recessionary housing and commercial property value declines, but growth appears to have resumed at a moderate pace. Given this softening in tax base performance and new construction activity, Fitch expects future tax base growth to modestly outpace inflation.
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 with significant voter support.
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 (65% of general fund expenditures) followed by public works (18%). Total spending has increased at a manageable pace in recent years, maintaining alignment with revenue performance. Future spending will likely continue in line with revenues and inflation over time given limited drivers for local service demand.
The town maintains a solid level of spending flexibility owing largely to low costs for debt and retiree benefits at 7.3% of governmental fund spending. Costs are roughly split between debt service and contribution requirements for the town's pension plans, while other post-employment benefits (OPEB) spending is minimal. 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 (3.2%) of resident personal income. Liabilities are made up mostly of the town's direct debt obligations, which amortize at a moderate pace of 60% of principal retired within 10 years. 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 manages two single-employer defined benefit pension plans for general employees and police personnel. Plan funding has increased significantly in recent years with a total asset-to-liability ratio of 78% between the two plans, based on Fitch's conservative 7% return assumption. 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 an '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, providing considerable ability to offset economic sensitivity.
Reserve levels remained strong throughout the recession, and the town has continued adding to its financial cushion with several years of strong surpluses. Unrestricted reserves equaled an ample 21.4% of spending in fiscal 2015, and fiscal 2016 (unaudited) figures indicate another surplus of approximately $2 million (approximately 2.5% of spending). The fiscal 2017 budget projects reserves to remain at current levels and the town expects to maintain its financial cushion in future years.
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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