Fitch Affirms Manchester, CT's IDR at 'AAA'; Outlook Stable

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

-- $89.3 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 general obligations of the town backed by its full faith, credit and unlimited taxing power.

KEY RATING DRIVERS

The 'AAA' IDR and GO ratings reflect the town's exceptionally strong financial operations, supported by its unlimited legal ability to raise revenues and solid expenditure flexibility. Fitch believes these credit positives will sustain the town's strong financial profile throughout the economic cycle.

Economic Resource Base

The town of Manchester is located approximately nine miles east of Hartford, and is recognized as a retail and business destination with over 1,400 establishments. The town's population increased roughly 6% from the 2000 to 2010 census, though has experienced slower growth in the past several years. Employment metrics hover near county and state levels, while resident income levels remain somewhat below.

Revenue Framework: 'aaa' factor assessment

Fitch expects revenue growth prospects to fall below historical growth levels but still remain solid. Property taxes and state aid comprise the majority of the town's general fund revenue. Municipalities in Connecticut have an unlimited legal taxing authority.

Expenditure Framework: 'aa' factor assessment

Fitch anticipates the natural pace of spending growth to be close to or marginally above that of revenue. Manchester derives solid expenditure flexibility from moderate carrying costs associated with debt service and retiree benefits. The town maintains adequate control over staffing, wages and benefits.

Long-Term Liability Burden: 'aaa' factor assessment

Debt and net pension liabilities are modest as a percentage of personal income. The town's proposed debt plans are sizable, though debt levels are expected to remain relatively stable given rapid amortization of outstanding debt. Unfunded pension liabilities are manageable; however, other post-employment benefits (OPEB) are more considerable.

Operating Performance: 'aaa' factor assessment

Fitch expects the town to maintain balanced operations throughout a mild economic downturn due to its superior budgetary flexibility. Active budget management practices further enhance the town's operating performance.

RATING SENSITIVITIES

Long-Term Liability Burden: The rating is sensitive to changes in the town's liability levels, including debt issuances beyond current plans and material increases in the town's OPEB liability.

CREDIT PROFILE

Manchester is a suburb of Hartford favorably positioned along I-84 with a fairly sizable and diverse commercial core. The town has a large retail presence anchored by The Shoppes at Buckland Hills, a 1.1 million square foot shopping and dining destination. Manchester Memorial Hospital, the town's second largest employer, was recently purchased by a private for-profit health system. Benefits from the sale include new property tax revenues from the hospital, which will become taxable for the first time next year, and increased capital investments.

Revenue Framework

Property taxes are the town's primary revenue stream, at roughly 72% of fiscal 2015 revenues. State aid, which is presently prone to volatility due to state budgetary pressures, largely accounts for the remainder of the town's revenues.

The natural pace of revenue growth has historically been strong, growing at an average annual rate of 3.9% between fiscals 2005 and 2014. Fitch expects future revenue prospects to be somewhat tempered given slower tax base growth, though the town still benefits from modest economic development. The last tax base revaluation (effective fiscal 2013) resulted in a 9.2% decline in the taxable grand list, reflective of post-recessionary property value declines. The town is currently performing its statutorily required five-year assessment, which will be effective fiscal 2018. Management expects the valuation to remain relatively unchanged.

The town has unlimited legal taxing authority over residential and commercial property.

In fiscal 2017, state legislation will cap the motor vehicle tax rate at 37 mills, and at 32 mills every year after. The Municipal Revenue Sharing Grant incorporates an additional amount to mitigate revenue loss stemming from the cap, though the town's share of the grant may be reduced due to state budget cuts.

Expenditure Framework

The town's general fund expenditures are primarily driven by educational costs, which represent three-fifths of the fiscal 2017 budget. Public safety represents the town's second largest expenditure item at 10%.

Fitch expects the natural pace of spending growth to match or marginally exceed revenue growth as capital infrastructure needs will continue to drive increased spending in the medium term.

Fixed carrying costs for debt service, pension and OPEB are moderate at 12% of governmental expenditures, and are expected to increase marginally due to new issuance and rising retiree costs. The town is able to cut some miscellaneous general fund expenditures if required, but maintains more significant expenditure flexibility in reducing consistent pay-go spending on capital projects. Management also holds moderate control over its workforce of nearly 1,700 employees. Union contracts are subject to arbitration, but a decision may be rejected by a two-thirds vote by city 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.

Long-Term Liability Burden

Manchester's long-term liability is low relative to its economic resource base, with unfunded pension liabilities and overall debt totaling 5.8% of personal income. Future borrowing plans include issuing the remaining portion of previously authorized debt for school and infrastructure construction costs (roughly $32 million), $15 million of which management expects to bond for in fiscal 2017. Fitch projects liability levels will remain consistent with the 'aaa' assessment given rapid amortization of outstanding debt.

Manchester administers one single-employer pension plan which covers substantially all of its employees except teachers and the regular members of the fire department. Certified teachers are covered by the State of Connecticut Teachers' Retirement Fund, for which the state is liable, and firefighters participate in Municipal Employees' Retirement System. The town's pension plan was closed to new employees in 2004, with the exception of police. Employees hired subsequently participate in a defined contribution plan. Manchester's pension plans are funded at 74.7% based on the Fitch-adjusted 7% rate of return, resulting in a net pension liability of $62.7 million.

As of the July 1, 2014 valuation, OPEB liabilities total $169.1 million, or 6.2% of personal income and 3.0% of market value. In fiscal 2009 the town established an OPEB trust, which was initially funded on a pay-as-you-go basis. Management is currently developing a strategy to further fund the liability.

Operating Performance

The Fitch Analytical Sensitivity Tool suggests the town may experience modest revenue losses in a moderate economic downturn. Given the town's high level of fundamental financial flexibility, Fitch expects that Manchester will continue to maintain high reserves and demonstrate financial resiliency. Fitch believes the town could consistently comply with its formal reserve policy equal to 5%-7% of revenue.

Manchester 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.

Unaudited fiscal 2016 results indicate a surplus, reflective of revenues $2.8 million above budget, largely due to vacancy savings and improved delinquent tax collections. The fiscal 2017 budget projects a 2.1% increase in spending from the year prior, a growth mainly due to increased debt service and public safety costs, and a $1.18 million use of fund balance to mitigate tax rate increases.

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=1013348

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https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Rachel Grossman
Analyst
+1-646-582-4967
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rachel Grossman
Analyst
+1-646-582-4967
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Maria Coritsidis
Analytical Consultant
+1-212-908-0514
or
Committee Chairperson
Barbara Ruth Rosenberg
Senior Director
+1-212-908-0731
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com