Fitch Affirms Bridgeport, CT GO Bonds at 'A'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on the following outstanding city of Bridgeport, CT general obligation (GO) bonds:

--$28 million GO refunding bonds, series 2004C;

--$255 million GO pension bonds, series 2000B;

--$39 million GO bonds, series 2006B;

--$3 million GO refunding bonds, series 2013A.

Fitch has also affirmed the city's Issuer Default Rating at 'A'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are general obligations of the city backed by its full faith and credit and unlimited taxing authority.

KEY RATING DRIVERS

The revision to a Stable Outlook reflects management's recent efforts at budget stabilization and Fitch's expectation for gradual improvement in reserves. Bridgeport's financial flexibility remains limited as evidenced by its low level of liquidity and continued reliance on short-term cash flow borrowing. Management has addressed structural budget issues through a combination of expenditure cuts, asset sales and debt restructurings, but Fitch expects future costs associated with employee salary, health and retiree benefits to continue to pressure the budget. Natural revenue growth is expected by Fitch to be slow and will depend in part upon completion of projects which have been approved or are in the pipeline and their contribution to tax base growth. Long-term liabilities are elevated, and other post-employment benefit (OPEB) liabilities significant. The variability of future state aid due to the state's own budget issues could result in future financial pressure.

Economic Resource Base

Bridgeport is Connecticut's largest city and has an estimated 2015 population of 147,629, which is up 2% since 2010, reversing a declining trend. It is located 63 miles north of New York City and borders the towns of Fairfield, Trumbull and Stratford, CT. The city has a diverse economic base with the largest employers in health care, higher education, manufacturing, and financial services; however, historically high unemployment rates and below-average wealth levels have underscored weakness in the local economy.

Revenue Framework: 'aa' factor assessment

Bridgeport's primary source of revenues is property taxes and state and federal aid. Historical growth in revenues has resulted from a combination of tax levy increases and tax base growth. Fitch expects future revenue growth to be in line with inflation absent policy action, supported in part by a number of new developments either underway or proposed that are expected to improve the tax base. There are no legal limits on the city's independent revenue-raising power.

Expenditure Framework: 'a' factor assessment

Employee-related salary, medical, and pension costs dominate spending. Fixed costs for required pension contributions, OPEB and debt represented 20% of fiscal 2015 governmental spending, and are expected to remain a driver of the budget. The city will need to manage expenses closely to match potential slow revenue growth. Control over headcount, wages, benefits and work rules is limited by staffing and labor contract requirements.

Long-Term Liability Burden: 'a' factor assessment

Debt and unfunded pension liabilities are moderate at around 19% of personal income or 12% of market values. OPEB liabilities are high and represent another 17% of personal income. Fitch expects the city's long-term liability burden to remain generally around these levels for some time.

Operating Performance: 'bbb' factor assessment

The city has historically maintained a low level of reserves but this is somewhat offset by what Fitch considers a high level of inherent budget flexibility in the form of unlimited taxing authority and adequate spending control and a record of low revenue volatility. Management's practice of spending deferrals and use of non-recurring revenue sources to balance operations has maintained budget balance, but overall liquidity is low resulting in a reliance on short-term cash flow borrowing.

RATING SENSITIVITIES

Revenue Progress and Budget Management: The rating assumes that the city's revenues will grow at a pace generally in line with inflation going forward, benefitting from development in progress. The rating is also sensitive to the city's ability to continue to address any budget imbalances and maintain adequate gap-closing capacity.

CREDIT PROFILE

Major employers residing in the city include Bridgeport Hospital, St. Vincent's Medical Center, the principal office of People's United Bank, Sikorsky Aircraft and University of Bridgeport. Employment levels improved in 2014 and 2015 but unemployment remains above state and national averages. The poverty rate was a high 21% in 2015, compared to 15% for the U.S.

The city underwent a seven-year property revaluation effective Oct. 1, 2015 that resulted in a 14% decline in taxable values. The city chose not to undergo a five-year revaluation as typically performed by municipalities in Connecticut after the state gave communities the option in 2014 to delay their revaluation by two years. Changes in tax base values between revaluations only take into consideration new development, additions and tax appeals, and do not consider changes in property values. The city's prior revaluation effective Oct. 1, 2007 had resulted in 21% growth in the tax base.

Fitch expects that the various projects underway or planned should help improve the city economy and tax base gradually over the next several years, although the magnitude of the projects and time to completion still provide some uncertainty as to the level of these benefits. The city's new waterfront development project known as Steelpointe Harbor is expected to generate substantial economic activity as well as new jobs. This 50-acre mixed-use development along Bridgeport Harbor includes a Bass Pro shop which opened in November 2015, aided in part by $31 million in state-issued economic development bonds, with a second phase of projects underway. Additional projects approved or in development downtown include residential, retail and office projects. PSE&G received approval for a new $550 million gas power plant in the city with construction to begin in 2017.

Revenue Framework

Property taxes represent approximately 48% of fiscal 2017 budgeted general fund revenues with state and federal aid accounting for a sizable 42%, primarily for education. Management has the independent legal ability to raise taxes without limit. Before the approximate 4.8% increase in the budgeted tax levy in fiscal 2017, the city had historically not made significant increases in the tax rate.

Fitch expects future revenue growth to be in line with inflation absent policy action, as the new developments are expected to result in strong building permit revenues and growth in the tax base. The city is dependent on state aid for city and school-related operations and the level of future funding could be affected negatively, as the state manages its own budget pressures.

Connecticut municipalities have unlimited taxing authority on real and tangible property. The motor vehicle tax rate has been capped at 37 mills by the state in fiscal 2017.

The city's largest taxpayer at 5%, Wheelabrator Bridgeport, LP, a solid waste-to-energy facility operator, has appealed its property valuation for several years. The city and Wheelabrator are currently engaged in nonbinding mediation and the city may be required to refund or credit any amount overpaid by Wheelabrator. Fitch expects a possible negative outcome to the city but will continue to monitor the outcome of this appeal.

Expenditure Framework

Bridgeport's spending is primarily for education and personnel costs. Education accounts for close to 50% of the city's budget, with public safety the second largest line item at another quarter of the budget. Fitch expects the city's overall spending needs will increase in the future at a pace above natural revenue growth due to the demands of pensions and the general rise in employee medical and salary costs.

Management was successful in negotiating employee concessions related to growing healthcare costs, requiring a larger share of the costs to be covered by its employees, and it continues to examine additional cost saving measures relating to its health benefits. The city has the ability to reduce expenses tied to it services. Management has the legal ability to reduce non-public safety staff at any time if necessary and impose furlough days. Union contracts are subject to arbitration but a decision may be rejected by a two-thirds vote by city council. Arbitration decisions are required to take into consideration the financial capability of the employer.

Total carrying costs for debt service, required pension contributions and OPEB pay-as-you-go totals 20% of total governmental spending for fiscal 2015. This ratio is expected to remain close to this level as debt service costs are not expected to escalate materially. Pension costs will likely continue to rise due in part to the low funded level of the city's Plan A and a history of underfunding of other closed city administered plans.

The city maintains an internal service fund to account for its self-insured health benefits which includes an actuarial estimate of liability for present and future workers' compensation claims. The fund continues to have a sizable deficit equal to $68 million (12% of spending) as of June 30, 2015, which is down from $88 million two years prior. Approximately $59 million represents present and future estimated workers' compensation claims. Fitch believes amortizing the current deficit balance in the near term will be challenging given the city's limited financial flexibility.

State legislation was passed last year imposing a 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 certain expenditures including debt service, special education, court orders or arbitration awards, payments on unfunded pension liabilities and non-recurring capital expenditures in excess of $100,000. 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 intends to comply with the cap. Fitch does not believe the cap will have a notable impact on the city's financial operations due to the permitted exclusions.

Long-Term Liability Burden

Long-term liabilities for debt and unfunded pensions represent a moderate 19% of personal income. Debt levels account for roughly 60% of the metric and are expected to increase moderately taking into consideration future manageable borrowing plans and the rate at which existing debt is repaid. The city's unfunded OPEB liability is almost as high as debt and pensions combined at 17% of personal income and efforts to control growth in this liability are ongoing.

The city administers four defined benefit pension plans for public safety, janitors and engineer employees. Other employees are covered under the state-operated Municipal Employees Retirement Fund (MERF) and the State Teachers' Retirement System.

In August 2000, the city issued $350 million in pension obligation bonds to finance 79% of its then unfunded liability under its public safety Plan A, closed to new enrollees since January 1984. The bonds were issued pursuant to state statutes and, in 2009, special legislation was passed by the Connecticut General Assembly that permitted the city to limit its pension contribution for its Plan A to below the annual required contribution (ARC). After a period of underfunding, full funding of the ARC was realized in fiscal 2015 and 2016. The unfunded liability for the Plan A pension plan is $253 million as of June 30, 2015, using the plan's 7% investment rate of return, and a low 28% funded.

The city maintains a Plan B for retired police as of April 2012 and a Plan B for retired firefighters as of July 2013. As of July 1, 2015 these plans were 59% and 80% funded, respectively, although historically annual contributions have in many years been below 100%. The city makes pay-as-you-go payments for its janitor and engineer plan and annual payments are not material.

The city's current employees, excluding teachers, participate in the state-administered MERF. Based on a measurement date of June 30, 2015, the city's 26.37% proportionate share of the plans pension liability was $63 million and the plan's fiduciary net position as a percentage of the total pension liability was 90.5%. Applying Fitch's assumed 7% investment rate of return the funded level declines to an estimated 82%.

The city funds it OPEB costs on a pay-go basis. As of July 1, 2014, the city's unfunded OPEB liability was a very high $1 billion, about 16.7% of personal income or 11% of market value. New labor concessions were established around 2012 that require higher healthcare contributions of at least 25% from city employees. New employees experience an increase of 1% per year in their contribution for health benefits until they reach the maximum contribution rate of 50%. In fiscal 2016, over 80% of city employees now contribute 31% of the costs of medical and prescription benefits, according to management. Nevertheless, Fitch expects the city's long-term liabilities associated with retiree benefits to remain high for some time.

Operating Performance

The city's financial reserves have remained relatively stable over the past six fiscal years through fiscal 2015 with levels hovering between 2%-3% of spending. Operating performance would likely be stressed in a future potential economic downturn due to the city's low reserve levels, although Fitch expects the city would take actions necessary to restore its financial resilience using its unlimited taxing authority and adequate expenditure management flexibility. During the most recent downturn management demonstrated its ability to reduce spending through cost controls, staff reductions, and deferred hiring practices. Fitch expects management would take similar actions if needed to maintain its moderate level of financial resilience in a future downturn.

The projected operating results for fiscal 2016 reflect positive revenue and expenditure variances to budget and a modest operating surplus. The newly elected administration which took office in December 2015 had projected a fiscal 2016 mid-year budget gap of approximately $20 million (3.8% of budget) due to underbudgeting of expenses including required pension contributions, cost of living adjustments and overtime costs. Revenue expectations for property tax collections in arrears and state aid were also judged to be optimistic. Through a combination of one-time revenue influxes achieved with a debt refunding ($3.5 million) and asset sales ($6.7 million) along with a restructuring of personnel and cost controls management was able to eradicate the imbalance. Fund balance levels are estimated to remain between 2% and 3% of general fund spending.

The fiscal 2017 budget of $552 million includes a tax levy increase of around $15 million and includes contingencies for unsettled labor contracts and $2.5 million for fund balance growth. Other revenues were conservatively budgeted and management's estimates to date reflect an estimated additional $6.2 million in revenue-sharing grant money from the state over a city budgeted $10 million level and higher than budgeted building fees due to new development. Operating risks which could affect year-end results include the level of public safety overtime realized and resolution of open labor agreements at or near budgeted contingency levels.

Management has made a concerted effort to begin improving its fund balance position as evidenced by its fiscal 2017 contingency reserve budget with a goal to help improve its financial flexibility and reduce its reliance on short-term borrowing with tax anticipation notes (TANs). The city plans to issue $40 million in TANs this fiscal year in two even tranches which is $10 million less than the amount issued during fiscal 2016 and down from the $60 million in fiscal 2015.

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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Fitch Ratings, Media Relations
Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Kevin Dolan
Director
+1-212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575

Contacts

Fitch Ratings, Media Relations
Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Kevin Dolan
Director
+1-212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575