NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating to the City of Worcester, MA's (the city) general obligation (GO) bonds:
--$31.3 million GO municipal purpose loan of 2011, series A, 'AA-';
--$1.96 million GO taxable municipal purpose loan of 2011, series B, 'AA-'.
The bonds are scheduled to sell competitively on Oct. 25, 2011.
In addition, Fitch affirms the city's following ratings:
--Approximately $552 million outstanding GO bonds at 'AA-'.
The Rating Outlook is Stable.
The bonds are a general obligation of the city and payable from taxes levied on all taxable property in the city, subject to statutory levy limitations.
KEY RATING DRIVERS
Strong Management Practices: Management has a demonstrated record of conservative budgeting and strong fiscal management contributing to recent improved financial performance.
Growth in Reserve Levels: Solid financial results the past two years, combined with prudent management decisions, has led to growth in the city's reserves.
Positive Economic Development: Major economic development projects underway within the city should provide economic growth and offset declining taxable values.
Below-Average Socioeconomic Indicators: Wealth levels are below state and national averages and unemployment remains high.
Debt ratios are Moderate: Future debt needs are manageable and principal amortization is above-average.
High Pension and OPEB Liabilities: Unfunded retiree benefit obligations are notable, but funding levels have improved.
Worcester, located roughly 39 miles west of Boston, serves as the regional economic hub of central Massachusetts. The city reports more than $2 billion in public and private commercial projects in various stages of development, including the mixed-use CitySquare project. In addition, a $120 million commuter rail expansion project is underway and is anticipated to provide a new rail terminal and 20-25 new commuter trains from Boston with anticipated completion in late 2012. This infrastructure expansion will almost certainly increase the attractiveness of Worcester as a commutable alternative to other suburban communities. The new development also bodes well for the city as it not only provides job growth but should offset recent declines in taxable assessed values (TAV) as a result of the nationwide recession and housing collapse. The city's TAV declined 10% in fiscal 2010 to $10.9 billion from fiscal 2009 levels as a result of the Jan. 1, 2009 revaluation and declined another 0.5% in fiscal 2011.
Income levels continue to lag with median household income at 71% of state and 89% of national averages. Unemployment rates remain elevated at 9% compared to 7% on a statewide basis as of August 2011. The presence of 10 higher education and several healthcare institutions provides stability to the local economy. Also, the city has experienced population growth over the past decade, increasing 4.9% to 181,045 presently.
The city's financial position has improved. Following general fund net income of $5.9 million in fiscal 2010, the city's unaudited results for fiscal 2011 include another surplus of $3.7 million due to higher than anticipated property and payments in lieu of tax revenues and increased meals tax revenues. The surplus is estimated to increase the general fund unreserved balance to $15.7 million or 2.8% of spending, up from 2.2% the year prior. The city also maintains a stabilization account that totaled $4.1 million (0.7% of general fund spending) in fiscal 2010. This fund may be used for any legally available purpose with supermajority council approval. As part of the city's Five Point Financial Plan, the city makes an annual contribution to this stabilization fund equal to at least 50% of year-end free cash. For fiscal 2011, the city contributed $5.8 million, increasing the fund to a notable $9.9 million which represents 1.8% of fiscal 2011 general fund spending. Growth in this fund is a credit positive and improves the city's financial flexibility.
This improvement in the city's finances has occurred despite pressure the last several years from state aid cuts, increases in employee benefits, and a weakness in economically sensitive revenues. To offset these financial pressures, management instituted operational reforms, a hiring freeze, and made conservative budgeting decisions. These actions, along with constant budget monitoring contributed to the city's positive operating results in fiscal 2010 and 2011. Additionally, city management partnered with union officials and its workforce to help stabilize its operations. It achieved a third year of zero wage increases for fiscal 2012 and successfully introduced a new healthcare program that is projected to save the city $5 million during this fiscal year.
The city's fiscal 2012 budget includes conservative revenue estimates, continued deposits to its bond rating stabilization fund and a 4.1% property tax increase (1.5% of which comes from new growth in assessed value). The city was able to avoid additional layoffs this fiscal year because of savings generated from the introduction of the new health plans and has made no reductions in essential services.
The city is subject to property tax levy limits imposed by the state's Proposition 2 1/2. Proposition 2 1/2 is a two prong test, whereby the tax levy cannot exceed 2.5% of the full and fair cash value (primary limit), and cannot exceed the prior years maximum levy by more than 2.5% excluding new construction (secondary limit). For fiscal 2011, the city levied $43.1 million below the primary levy limit and $10 million below the secondary limit. The city has historically kept a $10 million cushion below its secondary limit. Barring any unforeseen major reductions in assessed values, the city should retain the financial flexibility that this cushion affords going forward based on management's history of conservative budgeting practices. The city has prudently developed a five-year forecast identifying salary and education spending challenges and continues to build reserves to preserve financial flexibility, which Fitch views positively.
Overall debt ratios, excluding self-supporting debt, are moderate with debt per capita at $3,106 or 4.7% of market value. The debt amortization rate is rapid with 70% paid off in 10 years. Worcester's combined long-term liabilities related to retiree benefits are large. The city's pension funded ratio was 71% as of Jan. 1, 2011; however, using Fitch's more conservative 7% discount rate assumption, the pension plan would be 62% funded. The city's stated unfunded pension liability at Jan. 1, 2011 totaled $300 million or a moderate 2.5% of market value. The city contributed 100% of its annual required contribution (ARC) of $29.8 million towards its pensions in fiscal 2011, equal to 5.3% of general fund spending. The city budgeted $32.7 million in fiscal 2012 (up 9.9%) and estimates a $35.3 million ARC in fiscal 2013. The city has always made 100% of its required contribution.
The city's unfunded other post employment benefits (OPEB) liability totaled $765 million as of June 30, 2010 or 6.4% of market value (MV), but due to the recent healthcare reforms the city's actuary has estimated that its OPEB liability will be 13% less at approximately $665 million (5.5% of MV). The city funds annual OPEB costs on a pay-go basis.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 15, 2011;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria