Fitch Upgrades New Britain, CT's GO Bonds to 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded the following City of New Britain, CT's general obligation (GO) bonds to 'A-' from 'BBB+':

--$23.7 million outstanding GO pension bonds series 1998;

--$0.7 million outstanding GO pension bonds series 2005;

--$24.2 million outstanding GO bonds, series 2010B-2 and 2010B-3;

--$9.6 million outstanding GO refunding bonds.

In addition, Fitch upgrades the city's Issuer Default Rating (IDR) to 'A-' from 'BBB+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are backed by New Britain's full faith, credit, and unlimited taxing authority.

KEY RATING DRIVERS

The upgrade to 'A-' for the city's IDR and GO bond rating and the revision of the Outlook to Stable reflect the application of Fitch's revised criteria for U.S. state and local government credits, which was released on April 18, 2016. Revenue raising measures, significant cost cutting efforts and one-time savings from a debt restructuring have supported recent positive results and improved reserve levels. Fitch expects future expenditure growth to be moderate and long-term liabilities to remain manageable given future modest debt plans and current manageable net pension liabilities.

Economic Resource Base

The city of New Britain (population 72,939) is located in the center of Connecticut, eight miles from the state's capitol, Hartford, and a two-hour drive from New York City and Boston. It has an estimated 2015 population of 72,808, which rose a very modest 1.8% from 2000.

Revenue Framework: 'a' factor assessment

Fitch expects future natural revenue growth to improve modestly as new development efforts proceed and housing values continue their slow growth. Revenue growth was below the level of GDP and CPI over the 10-year period 2004-2014 reflective of a stagnant tax base. The city has an unlimited legal taxing authority.

Expenditure Framework: 'a' factor assessment

Fitch expects the natural pace of spending growth 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 city has adequate controls over employee headcount and wages. A state-wide 2.5% cap on spending beginning with fiscal 2018 budgets will likely provide additional spending restraint, although exemptions exist for some items, including debt service.

Long-Term Liability Burden: 'aa' factor assessment

Fitch anticipates New Britain's long-term liability burden to remain moderate based on a manageable borrowing plan and a modest net pension liability. The city's debt and adjusted unfunded net pension liabilities are manageable at 16% of personal income.

Operating Performance: 'a' factor assessment

Operating performance has varied over the past five fiscal years due to stagnant revenue growth and a reliance on non-recurring revenues to subsidize the budget. Operating performance could be stressed in a future potential economic downturn, although Fitch expects the city would recover financial flexibility on the basis of its high level of budgetary flexibility and improved level of reserves.

RATING SENSITIVITIES

Financial Management: The IDR and GO rating are sensitive to management's ability to manage its finances through changes in the economic cycle and to maintain an adequate level of reserves. A continued reliance on non-recurring revenue sources to subsidize future budgets could pressure the city's financial profile and the city's ratings, although Fitch expects management to gradually balance operations with recurring sources without eroding reserves.

CREDIT PROFILE

The city's major employers include the state and the city, as well as the Hospital of Central Connecticut (2,900 employees) and the Hospital for Special Care (1,080 employees). Stanley Black & Decker, a tool manufacturing company, maintains its world headquarters in the city and has 890 employees. The city is also home to Central Connecticut State University since 1849, with 12,000 students enrolled.

The opening in March 2015 of the 9.5 mile CTfastrak busway corridor, which enables a 15 minute bus ride from its central hub in New Britain into downtown Hartford, has created an opportunity for new development in New Britain's downtown. Officials report at least a half dozen projects have been announced or completed helping attract developers for potential future projects. A new Costco opened in October 2015, creating new job opportunities for residents and additional tax revenues for the city.

The city's wealth levels have historically been below state and national levels and unemployment rates are above average. The poverty level reported for 2014 by the U.S. census was a high 22.4%.

Revenue Framework

Property taxes represented 54% of general fund budgetary revenues in fiscal 2015 followed by state revenues at 41%. Management has the independent legal ability to raise taxes without limit. State aid has been subject to cuts recently as the state manages its own financial challenges.

Fitch expects modest tax base growth in-line with inflation over time. Housing values have experienced a modest 2.1% increase year over year through August according to Zillow.com, and Zillow projections call for growth to remain similar over the next year. The state requires local governments to undergo a revaluation every five years. Between valuations, tax base changes reflect only appeal results and property improvements or new additions but not the results of sales of property. The city's taxable grand list (assessed value) experienced a notable 16.9% decline to $2.45 billion based on its Oct. 1, 2012 five-year revaluation (effective for fiscal 2014), reflective of a decline in property values following the recession. The grand list experienced modest growth in fiscals 2016 and 2017 resulting in additional tax revenues of approximately $750,000 and $960,000 (about 0.4% of the general fund budget) in those years, respectively.

Expenditure Framework

New Britain's spending is primarily for education and city employee salary and benefits. Growth in medical benefit expenses, contributions to education and debt service were expense drivers during fiscal 2011 through 2014. Management took significant efforts to curtail spending in fiscal 2015 to meet growth in these recurring expenditures including a sizable tax rate increase and debt restructuring.

Fitch expects spending to be slightly ahead of revenue growth excluding policy actions. Fixed costs for debt service, pensions and OPEB contributions represent a manageable 16% of governmental spending in fiscal 2015. Debt service costs will grow next fiscal year but the level of growth was controlled through a recent bond restructuring. Management has recently implemented a new healthcare system with higher deductibles resulting in lower projected costs for the next few years.

The city has the ability to reduce expenses tied to its services although significant cost cutting measures were implemented the past few years. Additional cost cutting measures, although available, would likely begin to affect services. The city makes annual contributions to the school department and such level remains fixed going into the next fiscal year limiting flexibility. 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 city's legislative body. Arbitration decisions are required to take into consideration the financial capability of the employer.

State legislation was passed last year imposing a 2.5% spending 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. Fitch expects the city to manage within this cap and its impact to not be material on its finances due to improved budget balancing measures instituted recently.

Long-Term Liability Burden

Long term liabilities for debt and unfunded pensions represent a moderate 12% of personal income. Fitch expects liability levels to remain moderate given the city's manageable future borrowing plans and modest level of its net pension liabilities. The city-managed police and fire pension plans were closed to new employees as of 2000 and 1995, respectively. The city's annual pension contributions to these plans have been below 100% in some years. The city contributed 58% or $1.1 million less than the annual required contribution (ARC) in fiscal 2015. For fiscals 2016 the city contributed $575,000 less than the ARC and budgeted the same for fiscal 2017. Their estimated combined net pension liability as of June 30, 2015, adjusted by Fitch using a 7% investment rate of return, is low at $45 million, largely due to the issuance of pension obligation bonds.

The majority of city employees, excluding teachers, participate in the state-administered Municipal Employees Retirement Fund which has an estimated Fitch adjusted net pension liability of $53 million as of June 30, 2015.

The city's future OPEB liability is manageable at $67 million as of January 2014 largely due to the benefits generally being provided to retirees and their dependents for a period of seven years from the date of their retirement. The city has made close to 100% of its OPEB annual contribution the past four fiscal years and amounts in excess of pay-go have been deposited into an OPEB trust. The trust had $3.2 million in assets as of July 1, 2014.

Operating Performance

Fitch considers the city's inherent budget flexibility to be high and the city has historically, with the exception of fiscal 2014, maintained reserves at or above the level Fitch deems adequate to maintain an 'a' financial resilience assessment. During fiscal 2014, the budget had relied on aggressive revenue assumptions approved by the prior administration which did not come to fruition. The city has recently built up reserves to sound levels, and Fitch expects management may rely on reserves to get through a future economic downturn and then restore reserves during a recovery.

To address fiscal pressures during the recent recessionary period, management initially relied on non-recurring revenue sources but then made significant expenditure cuts, reductions in staff, negotiated employee concessions and ultimately raised property taxes. Additional measures included the fiscal 2015 and 2016 restructuring of outstanding debt due to an ascending debt service schedule. Reserves have been restored to more adequate levels and future cost growth has been controlled, bringing some stabilization to the city's operating budget.

Fitch does not consider the restructuring of debt for cash flow savings a prudent practice, but the city's very rapid debt amortization schedule (80% principal retired in 10 years) helped provide it with the flexibility to restructure its front-loaded debt to achieve budget relief over the next few years

The fiscal 2015 budget was 8.2% lower than the prior year's budget. Management approved a 7% increase in the tax levy, which was the first above the revenue neutral rate in over 10 years. Approximately $3.5 million of savings from a debt restructuring also helped balance the budget. The general fund experienced a net operating surplus of $10 million (4.4% of spending) increasing the unrestricted fund balance to $15 million or 6.5% of spending. Bond premiums of $3.7 million contributed to the surplus. The city also benefitted from $742,000 in one-time sale of delinquent tax liens and lower than anticipated public safety expenditures.

The fiscal 2016 budget totaled $250 million and the tax rate was kept flat. Management is projecting an approximate $13 million net operating surplus with approximately $10 million attributed to bond refunding savings and premiums. Annual savings were derived from certain healthcare concessions agreed to by major union groups along with conservative assumptions for non-tax revenues. Tax collections were also stronger than anticipated coming in at 98%.

Management has allocated $10 million of the fiscal 2016 surplus (about 4% of the budget) to subsidize the fiscal 2017 budget and to help offset state aid cuts and a $2.5 million increase in school funding. The tax rate rose slightly to 50.5 mills from 49 mills and 0.8% grand list growth contributed new tax revenues of $960,000. Fitch expects management to gradually eliminate its structural imbalance over the next few years and eliminate its reliance on non-recurring revenue sources. Fitch also expects management will maintain reserves at close to or better than current levels to help mitigate unanticipated losses in revenues in the future.

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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Fitch Ratings, Inc.
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or
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+1-212-908-0833
or
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Barbara Ruth Rosenberg
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or
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Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1-212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com