Fitch Affirms Bridgeport, CT's GO Bonds at 'A'; Negative Outlook Maintained
NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms its 'A' rating on the following outstanding city of Bridgeport, CT's (the city) general obligation (GO) bonds:
--$0.8 million GO bonds, series 2003B;
--$46.6 million GO refunding bonds, series 2004C;
--$274.2 million GO pension bonds, series 2000B
--$70.9 million GO bonds, series 2006A and 2006B;
--$1.0 million GO refunding bonds, series 2006C;
--$37.2 million GO bonds, series 2007A;
--$14 million GO refunding bonds, series 2013A.
In addition, Fitch withdraws the rating on the city's GO bonds series 2004A (all maturities) as these bonds have been pre-refunded.
The Negative Rating Outlook is maintained.
The bonds are general obligations of the city and backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
FINANCIAL FLEXIBILITY LIMITED: The Negative Outlook reflects Fitch's opinion that the city faces continued fiscal challenges and limited flexibility. Management has made progress in stabilizing its budget with successful negotiations with its unions, but reserve levels remain low and are not expected to increase materially in the near term as employee-driven costs pressure the budget and new tax base growth is slow to develop.
HIGH UNFUNDED FUTURE EMPLOYEE COSTS: Large unfunded pension and other post-employment benefit (OPEB) and internal service fund liabilities remain a burden and are expected to continue to pressure the budget. However, management has successfully negotiated higher health insurance contributions from its employees as well as the transfer of two of its pension plans for active employees to the state-operated plan, essentially requiring it to pay the full annual required contribution (ARC).
HEAVY DEPENDENCE ON STATE AID: The city budget relies heavily on state funding for education and payments in lieu of taxes for tax-exempt properties. State funding levels have been volatile in recent years but the outlook is positive for this coming fiscal year.
ABOVE-AVERAGE DEBT LEVELS: Overall debt ratios are above average, and carrying costs, which include debt service, pensions and OPEB, are moderate but expected to increase gradually over time.
WEAK SOCIOECONOMIC INDICATORS: Unemployment rates remain high and wealth levels are below average. City population has been increasing in the past decade, reversing a declining trend.
FINANCIAL PERFORMANCE: The city's ability to continue to manage its growing employee costs and maintain at least existing or better reserve levels (recognizing the fairly thin financial margin that these provide) could result in a revision in the Rating Outlook to Stable. Actions contrary to this could result in a downgrade.
Bridgeport is Connecticut's largest city and has a 2013 population of 147,216 which notably is up 5.5% since 2000. It is located 63 miles north of New York City and borders the towns of Fairfield, Trumbull and Stratford, CT.
DIVERSE ECONOMY OFFSET BY WEAK SOCIOECONOMIC INDICATORS
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 (averaging over 12% during 2009 through 2012) and below-average wealth levels have underscored weakness in the local economy. The most recent unemployment rate of 10.2% for April is down from 11.5% the prior year and reflects an improvement in jobs and labor force. Median household income in 2011 was 59% and 78% of the state and nation, respectively, and the poverty rate was an above-average 21.9%.
The city's $10 billion tax base increased by 1% in fiscal 2015 due to some moderate new development. The top 10 taxpayers are somewhat concentrated at 13% but are mainly comprised of utility companies. The city's largest taxpayer at 4.5% is Wheelabrator Bridgeport, LP, a solid waste-to-energy facility operator. It has appealed its assessment for the last seven years. In June of 2013, the state superior court dismissed the appeal on the 2007, 2008 and 2009 values but reduced the value on Wheelabrator's real property for 2010, 2011 and 2012 by an average of 27%. Wheelabrator has appealed the court's decision and the city has appealed the court's decision on the 2010 -2012 values. Wheelabrator has been paying the minimum required 90% of its tax levy during the appeal period and the city does not expect any retroactive reimbursements of tax payments to be made.
NEW DEVELOPMENT EXPECTED TO BOOST ECONOMY AND EMPLOYMENT
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 is planned to be anchored by a Bass Pro shop which has reportedly executed its lease for the site and received partial state assistance for construction of the store with completion expected late 2015. Fitch expects the several small new and redevelopment projects that are planned or in the works will help to improve the city economy and tax base over the next few years.
FINANCIAL RESULTS SHOW SMALL SURPLUSES; RESERVE LEVELS REMAIN LOW
For fiscal 2013 the city reported a small general fund operating surplus of $203,568 resulting in an unrestricted fund balance of $12.6 million or a low 2.1% of spending. Tax collections came in slightly over budget and an additional $2.8 million in state aid was received compared to budget. These funds helped the city to cover the additional expenses incurred during the various storms that the area experienced. Fitch notes that the city continued to fund less than 100% of its pension ARC in fiscal 2013 and had it done so, results may have been negative.
General fund revenues are led by property taxes (53%) and are heavily reliant on state aid funding (43%). City property tax collection rates have improved with the institution of regular tax lien sales. Leading city expenditures are for education and personnel costs. Approximately 75% of the city school budget is funded by the state.
The adopted budget for 2014 included a small millage increase and used conservative state funding amounts. Management reports that there were no material changes in state aid and debt service savings were experienced as a result of last year's debt refunding. Management expects another modest surplus and increase in general fund balance.
The $522.9 million fiscal 2015 budget is up approximately $5.7 million or 1.1%. Expenditure increases were attributed to the increase in the required funding for its closed pension Plan A and increases in state-mandated school funding. In addition to the tax increase, state aid expectations are up. The tax base revaluation scheduled for October 2013 will be delayed for two years as permitted by state legislation approved during the state's budget session. The decision to delay the implementation of the new revaluation, based upon 2008 values, was made due to the expectation for a severe drop in values and a resulting large tax increase for property owners. Management hopes the additional time will allow for property values to recover especially after a reportedly large number of property foreclosures drove down property values in the last few years. Property values were up a modest 3.7% through April year-over-year according to Zillow.com.
LARGE INTERNAL SERVICE FUND DEFICIT IMPROVES
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 $88 million at June 30, 2013, down from $94 million in fiscal 2012. The city has made changes to its carrier and is investigating open claims, leading to a reduction in overall claims. Fitch believes amortizing the current deficit balance in the near term will be challenging given the city's limited financial flexibility.
HIGH DEBT; CONTINUED LIQUIDITY NEEDS
Overall debt ratios are above average with debt-to-market value at 6% and debt per capita at $4,163, including the city's pension obligation bonds. Future debt needs are moderate and include street, park and school building projects. Amortization is average with 61% of par retired in 10 years.
Since 2006, the city has issued between $90 million and $100 million annually in tax anticipation notes (TANs) to supplement cash flow needs. A $20 million TAN was issued in April 2014 following a $71.5 million issue in October 2013. The city plans to borrow $60 million in TANs this fall, a decline in par borrowed compared to prior years. Annual debt service for fiscal 2013, inclusive of debt service for pension obligation bonds, represented a moderate 9% of total government spending.
SIGNIFICANT RETIREE OBLIGATIONS
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 the city is required to make its actuarially recommended contribution and maintain the 79% funded ratio that was borrowed for. Due to the recent economic downturn, special legislation was passed by the Connecticut General Assembly in 2009 that permitted the city to limit its pension contribution for its Plan A to $6 million for fiscal 2009, well below the ARC of $9.6 million. For fiscal 2010 the city contributed $4.7 million (38% of its ARC) and $4.6 million in 2011, which was greater than the $4 million allowed minimum contribution pursuant to the state waiver legislation but still well below the ARC.
For fiscal 2012 the city obtained a continued state waiver from the full actuarially required contribution and the state approved a 24-year level 5% amortization of the unfunded liability. Annual contributions for 2012 equaled $7 million (71.5% of ARC and 2% of general fund budget) and increased to $10.5 million and $11.6 million in fiscal 2013 and 2014, respectively. The unfunded liability for the Plan A pension plan was a sizable $201 million at July 1, 2013 and the plan was only 39% funded, assuming an 8% investment rate of return. Using a more conservative 7% discount rate, Fitch estimates this amount decreases to a low 35%.
The city, police and firefighters successfully negotiated a contract that transfers its active police and fire members to the state-administered MERF. The fire transfer was effective April 1, 2012 and the police transfer was effective July 1, 2013. For fiscal 2013 the city made contributions of $5.9 million to its Police Retirement Plan B equal to 76% of the ARC. As of July 1, 2012 the city-operated police and fire retirement plans were 78% and 177% funded, respectively. For MERF, the city contributed $12.8 million, equal to the required contribution and up from $9.6 million in fiscal 2012. The city makes pay-as-you-go payments for its janitor and engineer plan and paid $947,944 in fiscal 2013.
The city funds it OPEB costs on a pay-go basis. As of July 1, 2012, the latest available valuation date, the city's unfunded OPEB liability was a very high $723.7 million, or 7.3% of market value. This is down from the prior valuation of $916 million as of July 1, 2010 as a result of new labor concessions in place that require higher healthcare contributions from its employees.
Total carrying costs for debt service, pension ARCs and OPEB pay-as-you-go totals a moderate 17.2% of total governmental spending for fiscal 2013. This ratio is expected to increase slightly as pension costs rise due to the low funded level of the city's Plan A.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors, and Zillow, Inc.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria