Fitch Rates Waterbury, Connecticut's $320MM 2008 Taxable GO Pension Bonds 'BBB+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the city of Waterbury, Connecticut's approximately $320 million taxable general obligation (GO) pension bonds, series 2008. The bonds are expected to sell via negotiation on July 8, with proceeds financing a portion of the city's unfunded pension obligation. Fitch previously issued a rating for these bonds on May 20, but withdrew it on June 2 after the city delayed the sale due to market conditions. The city has since met their savings threshold and decided to issue the bonds.

In addition, Fitch affirms the rating on the city's approximately $75.5 million of outstanding GO bonds at 'BBB+' and the rating on the city's approximately $20.5 million of GO state capital reserve fund (SCRF) bonds at 'AA-'. The SCRF bonds carry a state debt service reserve replenishment mechanism that has been appropriated by the state and does not require further legislative approval. The Rating Outlook on all bonds is Stable.

The 'BBB+' rating reflects Waterbury's stabilized financial position following considerable operating deficits in the early part of the decade that resulted in negative general fund balances. The rating also considers the city's diversifying economy, which is somewhat offset by a high unemployment rate and slipping income levels relative to the state and nation. Debt levels, having been moderately low, increase to above-average levels with this issuance, and remaining employee benefit obligations are substantial relative to the city's tax base. The rating further reflects the city's strong tax-intercept program and the ability of the Waterbury Financial Planning and Assistance Board to be reinstituted if the city does not adhere to strict financial benchmarks.

With this issuance of pension bonds, Waterbury reduces its unfunded pension liability but increases its debt levels. Overall net debt rises to a high $3,975 per capita or 5.7% of taxable market value (TMV) from a below-average $991 per capita and 1.4% of TMV. The city projects total cash flow savings of at least $75 million on the combined pension annual required contributions (ARC) and debt service payments over the life of the bonds, assuming an 8.5% investment rate of return. However, Fitch notes that underperforming pension assets could lead to increased ARC payments, which might dilute or reverse projected cash flow savings and add budgetary pressure. All of the city's outstanding GO bonds are secured by a tax revenue intercept that provides for a first lien on city property tax revenues held by the trustee.

Pension bond proceeds will bring the system to roughly 70% funded from just 12.4% funded before this issuance. However, Waterbury's increased debt levels, combined with its substantial remaining employee benefit obligations, are a credit concern that could limit upward movement in the rating, barring significant economic improvements. The city's other post-employment benefits liability totals $604.3 million, or a high 8% of TMV.

Recent rating upgrades reflected the city's improved financial management, which was evidenced in the fiscal 2007 dissolution of the Waterbury Financial Planning and Assistance Board, a state oversight board created in fiscal 2002. Fitch downgraded the city's GO rating to non-investment grade in December 2000, in response to several years of general fund deficits. The poor financial performance was largely due to the city's slow response to the growing fiscal crisis and structural budget imbalances. The board's guidance, coupled with changes to the management team, resulted in seven balanced budgets beginning in fiscal 2002. The city also produced a three-year financial plan in fiscal 2007, approved by the oversight board, which projected unreserved fund balances and retained earnings for the general and enterprise funds.

Fiscal 2007 ended with a slight general fund surplus, bringing the unreserved general fund balance to $19.9 million, or 5.5% of spending. The city is required to appropriate monies in excess of 5% of working capital for the redemption of final-maturity SCRF bonds, pay-as-you-go funding of capital, or transfers to other funds requiring subsidies. This should result in unreserved general fund balances of between 5% and 6% of spending annually, a satisfactory level for the rating category. Officials' projections of at least a $1.3 million budgetary surplus in fiscal 2008 include an approximately $2.3 million unbudgeted legal settlement and the budgeted use of $3 million of fund balances.

Waterbury is located approximately 29 miles southwest of the city of Hartford. The city's historically manufacturing-oriented economy has diversified more recently. However, a high unemployment rate and weak income levels remain a credit concern. Area housing market data indicate softening conditions, though officials cite plans for condominium and single-family developments as evidence of ongoing residential construction. A fiscal 2009 revaluation boosted the tax base by 48.8% to $5.3 billion, and tax collection rates have improved to a three-year annual average of 96.6%. Population, labor force, and employment growth have been flat for several years.

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