NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to the city of New London, CT's bond anticipation notes (BANs) and general obligation (GO) bonds:
--$7,455,000 GO BANs 'F1+';
--$5,350,000 GO bonds, 2015 Lot A, 'A+';
--$1,100,000 GO taxable bonds, 2015 Lot B, 'A+'.
The BANs and bonds are scheduled to sell competitively on March 17. Proceeds will be used to fund outstanding BANs maturing on March 26, 2015 as well as to fund various capital projects.
In addition, Fitch affirms the following ratings on the city's outstanding GO bonds and BANs listed below:
--$38.9 million GO bonds, 2014 A & B; 2012 Lot C, 2012, 2009 at 'A+'.
The Rating Outlook is Stable.
The bonds and notes are a full faith and credit obligation of the city backed by its unlimited taxing power.
KEY RATING DRIVERS
NARROW RESERVES LIMITS FLEXIBILITY: Reserve levels are slim, and while the city has a plan in place to rebuild reserves to more robust levels, management will be challenged to do so as fixed costs rise and the economic recovery lags. However, Fitch expects the city to continue to appropriate increases to reserves.
MANAGEABLE LONG-TERM LIABILITIES: The city's overall debt levels are moderate and should remain affordable given the above-average principal amortization and the city's modest debt issuance plans. Pensions are well funded and total pension, debt and OPEB carrying costs are not burdensome.
WEAK DEMOGRAPHICS/DIVERSE ECONOMY: The unemployment rate remains elevated and economic indicators are below average, evidenced by weak income levels. However, the presence of health care and higher education institutions lend stability and diversity to the economy. Defense-related employment remains important to the local economy.
FUTURE MARKET ACCESS: The 'F1+' short-term rating on the series 2015 BANs reflects the city's overall credit characteristics, and the unlimited tax pledge for note repayment.
MAINTENANCE OF ADEQUATE LIQUIDITY/RESERVES: The city is focused on rebuilding its reserve and liquidity balances and Fitch expects the city to comply with its ordinance requiring annual contributions. Failure to both comply with this plan and fully fund the actuarially required pension contributions could result in negative rating pressure.
New London is located approximately an hour from Providence, RI and 120 miles northeast of New York City. Its population in 2013 was 27,545, up 7% from 2000.
STRUCTURAL IMBALANCE CAUSED DECLINE IN RESERVES
Large general fund operating deficits in fiscal years 2011 and 2012 significantly reduced the city's financial flexibility. The 2012 deficit was due to optimistic revenue assumptions as well as overspending by fire and public works departments. The fiscal 2012 unrestricted general fund balance of $1.3 million was a low 1.4% of spending.
Under new management, remedial actions were taken which included spending cuts and a tax increase, enabling a modest surplus for fiscal 2013. Year-end general fund reserves were $1.5 million or a still low 1.7% of spending.
City council approved a 3.4% tax increase in its fiscal 2014 budget, but the budget failed to be approved on the first submission and was revised with a 2.9% tax rate increase. Unaudited estimates for fiscal 2014 indicate a $584 thousand general fund operating surplus, bringing the unrestricted fund balance to a still low 2.4% of spending. Positive revenue variance from improved collection of tax delinquencies and ambulance fees as well as charges for outside work for the police department, contributed to the operating surplus. During fiscal 2013 and 2014 the city did not budget for 100% funding of the actuarially required pension contribution (ARC) as the city's historical practice has been to fund the city plan at 10% of payroll. The fiscal 2015 budget continues this practice.
The fiscal 2015 budget was also petitioned for a referendum, but voters upheld the budget by a wide margin. The budget reflects a 5% increase, with education spending increasing by a modest 2.3%. On the revenue side, intergovernmental revenues are budgeted to decline with increased reliance on property taxes. The fiscal 2015 levy is a 9.6% increase over the prior year levy. The city's property tax levy per capita is still low within the state.
The city's revenues consist primarily of property taxes and state aid for education. State aid revenues as a percentage of the budget is moderately declining and represent43.6% of fiscal 2014 revenue (unaudited). Rebuilding reserves would help safeguard the city's financial operations from state aid volatility.
The city has committed to further building of reserves and effective with the 2014 budget adopted a fund balance replacement plan ordinance requiring the city to annually budget at least $250,000 towards restoration of fund balance. The budget includes a $500,000 appropriation for reserves. The ordinance further requires all proceeds from asset sales to be dedicated to building reserves. The city holds a number of properties it is actively seeking to sell. Given the current low reserve level, Fitch views favorably the city's formal policy for rebuilding its reserves.
SLUGGISH ECONOMY WITH SIGNS OF DEVELOPMENT
Over the last 20 years the local economy has diversified away from a heavy reliance on defense-related employment with expansion in the service-related sectors. In addition, the presence of health care and higher education institutions lend stability to the economy. Major employers include Lawrence & Memorial Hospital (2,500 employees) and Connecticut College (909). The U.S. Coast Guard Academy is a major presence in the city with approximately 900 military and civilian employees. In April 2013, the National Coast Guard Museum Association announced that it will open a 50,000 square foot museum on the waterfront near New London's multi-modal transportation center.
Electric Boat, a division of General Dynamics, purchased a former Pfizer plant, transforming the facility into a design center for the U.S. Navy's next generation of submarines. In 2014 the Navy announced the award of a $14 billion, multi-year contract to Electric Boat, with employment projected to increase to 4,400. Electric Boat currently employs close to 3,000 individuals in New London and is one of the top 10 taxpayers.
Expansion at Electric Boat may help the city's struggling residential real estate market. Zillow Group data indicates a high 36.1% of homes have negative equity and home prices are forecast for a 3% decline over 2015.
The city schools are on their way to becoming the state's first all magnet school district. Strengthening of school programs should enhance the city's attractiveness to existing and new residents.
BELOW-AVERAGE SOCIOECONOMIC INDICATORS
The city's December 2014 unemployment rate remains elevated at 7.7% but less than the prior year's rate of 9.3%, as employment has outpaced labor force growth. The unemployment rate continues to exceed the state and national averages of 6% and 5.4%, respectively. Income levels are below state and national levels. The city's 2013 median household income was 65% of the state and 82% of the national average. The poverty rate rose to a high 24.9% relative to the national rate of 15.4%. The below-average socioeconomic profile also includes a large student population, as the city is home to Connecticut College, Mitchell College, and the Coast Guard Academy.
MANAGEABLE LONG-TERM LIABILITIES
Debt levels are moderate, with net overall debt equal to $2,086 per capita and 3.2% of market value. Bonded debt is rapidly amortized with 64% retired in 10 years. Fitch believes the credit quality of the BANs rests in the GO pledge securing the notes and the city's history of ready market access.
Long-term borrowing plans are manageable; over the next three years the city plans to issue up to $8 million in GO bonds, including $4 million for pension fund needs. In 2014 all city firefighters switched from a defined contribution plan to the state managed Municipal Employees Retirement System and entrance to the plan requires a $4 million contribution for unfunded liabilities.
Total fiscal 2013 defined benefit pension plan required contributions was $2.6 million, a manageable 2.2% of general government spending. The city administers one contributory and one non-contributory (closed) single-employer pension plan. The city fiscal 2014 contributions (unaudited) to the contributory plan was 63% of its ARC, and the fiscal 2015 budget improves ARC funding to a still-weak 74%. As of June 30, 2012 valuation, the unfunded liability for the two plans totaled $12.3 million, or a modest .7% of total taxable market value of real property.
In fiscal 2013, the city had defined contribution pension plans for firefighters and certain other employees. Police union members participate in the state's Municipal Employees Retirement System. The city makes 100% of its share of the plan ARC, which totaled $1 million in fiscal 2013. As of July 1, 2012 the plan reported a funded rate of 85%. The city's teachers participate in the state's teacher plan for which the city has no obligation.
The city's unfunded OPEB liability was a moderate $29.7 million as of July 1, 2012. The city makes pay-as-you-go contributions for OPEB and paid $1 million in fiscal 2013. Total carrying costs for debt service, pension and OPEB pay-go of $9.9 million equaled a very manageable 7.8% of total government spending for fiscal 2013.
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.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'Rating U.S. Municipal Short-Term Debt' (Nov. 27, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Rating U.S. Public Finance Short-Term Debt