Fitch Rates Hamden, CT's $14MM GOs 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB+' rating to the following town of Hamden, Connecticut general obligation (GO) bonds:

--$13.98 million GO refunding bonds, issue of 2015.

Bond proceeds will to be used to restructure series 2004, 2009A and 2014A bonds for upfront savings, with overall modest net present value savings. The bonds are expected to be sold through negotiation on June 3.

In addition, Fitch affirms the following ratings:

--$246.63 million GO bonds at 'BBB+';

--$17.96 million GO bond anticipation notes (BANs) 2014 at 'F2'.

The Rating Outlook for the bonds is Stable.

SECURITY

The bonds are a general obligation of the town backed by its full faith, credit, and unlimited taxing power.

KEY RATING DRIVERS

PENSION FUNDING PROGRESS: Recent issuance of pension obligation bonds and state legislation requiring full funding of the pension ARC by 2019, address the near insolvency of the town pension plan.

TAX INCREASES HELPING OPERATIONS: Modest operating surpluses have been achieved through tax rate increases, although reserve levels are still very low.

STRONG DEMOGRAPHIC PROFILE: Wealth levels are favorable and the poverty rate is low. The area economy benefits from a strong education and healthcare sector and an unemployment rate that approximates the national rate.

INCREASING FIXED COSTS: Overall debt metrics are midrange. Substantial increases in carrying costs are expected through 2019 as pension contributions rise.

ADEQUATE MARKET ACCESS: The 'F2' short-term rating reflects the general credit characteristics of the town and Fitch's expectation for adequate market access.

RATING SENSITIVITIES

CONTINUED PENSION FUNDING PROGRESS: Inability to follow through on plans to address the still significant unfunded pension liability would pressure the rating.

WEAKENED FUND BALANCE: Erosion of currently weak reserve levels could also be a credit negative.

CREDIT PROFILE

Hamden is a mid-sized town with a population of 60,868, bordering the north of New Haven.

PENSION PROGRESS

The funded status of the town's (closed) pension plan is poor due to a history of severe underfunding of the actuarially required contribution (ARC). The July 1, 2014 funded ratio was an extremely low 10%. The unfunded actuarial accrued liability (UAAL) of $406 million is a high 7% of the market value of real property. In February 2015 the town issued $125 million of pension obligation bonds (POBs) to fund a portion of the unfunded liability, increasing the funded ratio to a still low 39%.

Special legislation allows the town to gradually ramp up to full funding of the ARC; state statutes otherwise require full funding of the pension ARC upon issuance of POBs. Under the special legislation the fiscal 2015 pension contribution can be no less than 50% of the ARC and the contributions must increase each year to full ARC funding by 2019. The town's six year financial plan, projecting funding of the required ARC payments, indicates what Fitch considers moderate annual tax rate increases of approximately 4.6% will be required.

As long as the POBs are outstanding the town must provide annual reporting to the state, including demonstrated funding of the required pension contribution and an annual actuarial valuation of the pension plan. Previously, the town's actuarial valuations were done biannually; an annual valuation will enhance the ability to monitor the plan's funding status. The demonstrated commitment to ongoing full ARC funding would be a positive credit factor.

FUNDED RATIO STILL LOW

Actuarial projections indicate full funding of the pension plan in 30 years, predicated on an investment return assumption of 7%. While many assumptions are embedded in the projections, the investment return is among the more sensitive variables. Thus, a decline in the investment return assumption would result in substantial increases in the required pension contribution.

Another important variable is the cost-of-living-adjustment (COLA) given to retirees. Beginning in 2013, the town shifted from an automatic 3% COLA to a consumer price-based COLA (1.59%, 1.58% and 0% in 2013, 2014 and 2015, respectively) as is permitted under the plan. The actuarial report, and hence the reported unfunded actuarial liability, assume future COLAs of 3%.

DEBT LEVELS MIDRANGE

Debt levels are within the high end of midrange at $4,684 per capita or 5% of market value. The debt rate of retirement is on the low end of mid-range with 46% of debt retired in 10 years. The town's six-year capital improvement plan identifies $62 million in capital needs, with almost a third of the projects related to public works. The town's debt burden is not expected to change materially. Town charter limits capital-related debt service to 10% of budget and the town is well under the policy.

HIGH CARRYING COSTS

Together with debt service costs of $16.2 million in fiscal 2014, the servicing of long-term liabilities, which assumes full funding of the pension actuarially required contribution (ARC) but the pay-go amount for other post-employment benefit (OPEB), consume close to 27% of governmental fund spending, which Fitch considers high. The town has a large unfunded OPEB liability of $452 million (as of July 1, 2014) or 8% of market value. Hamden funds its OPEB on a pay-as-you-go basis, contributing $17.7 million of the $34.9 million total cost in fiscal 2014.

FINANCIAL PROFILE IMPROVING BUT STILL WEAK

Maintenance of financial health while the pension ARC ramps up is key to credit health. The town enacted tax rate increases in each of the past six years. According to 2013 data compiled by the state, the town's per capita levy was midrange among municipalities in the state, affording some room for tax increases. Tax increases to date have improved general fund structural balance, but full pension ARC funding is far from achieved and financial operations remain weak.

The town has had small operating surpluses in each of the past three years, but reserves remain very low. The town closed fiscal 2014 with a $528 thousand general fund operating surplus (0.3% of spending) and a narrow unrestricted balance of $2.2 million (1.1% of spending). During fiscal 2014 the general fund made transfer out of $480,000 for capital projects.

General fund liquidity is extremely weak at fiscal year-end, but based on cash flow statements provided by the town the fiscal year end is the lowest point in the year. Netting out of general fund cash both payables to the capital project fund and receipt of early tax collections leaves the general fund with virtually no cash at year end of fiscal 2014. The town's cash flow projections for the balance of fiscal 2015 indicate an improvement in cash. The town appropriated the first POB debt service payment in the fiscal 2015 budget, but issuance was delayed a few months. The first POB debt service first payment is in fiscal 2016, providing approximately $2.4 million of unutilized resources which the town intends to reserve for future debt service payments.

SURPLUS EXPECTED IN FISCAL 2015

The town's fiscal 2015 budget is balanced and includes a 2.5% property tax rate increase that generates an additional $4.5 million over the previous budget. Officials report that both revenues and expenditures are tracking favorably to budget and an operating surplus in excess of $500 thousand is expected; moreover, the additional surplus of $2.4 million is expected from the delay in POB issuance.

ADOPTED 2016 BUDGET

The fiscal 2016 adopted budget totals $211 million and includes a 2.4% tax rate increase, lower than previously projected in part due to the availability of debt reserves accumulated in fiscal 2015. Labor contracts are largely in place, with raises of 2% annually. Increased debt service costs for the pension obligation bond issuance are the primary cost driver. The town does not have a formal fund balance policy in place but the multi-year plan projects minimum annual operating surpluses of $500,000. Continued tax rate increases above the level needed for pension payments will be needed to restore fiscal health.

EDUCATION & HEALTHCARE ANCHOR ECONOMY

Several universities are located in the town, resulting in a sizeable and stable education sector presence. Most notably, Quinnipiac University (851 employees) lies within the town's borders, and Yale University (13,084 employees) is in adjacent New Haven. The town also benefits from the presence of several healthcare providers, such as Ardenhouse Care and Rehabilitation Center, a top employer with 370 employees.

The town's February 2015 unemployment rate of 5.7% compares favorably to the state (6.9%) and national (5.8%) rates. The town's labor force is exceptionally skilled, with nearly 42% of the adult-aged population holding a bachelor's degree or higher (or about 150% of the national norm). Wealth levels for the town are at least 20% greater than those of the nation and the poverty rate is a low 8.2%

STABLE TAX BASE, POSITIVE ECONOMIC ACTIVITY

The estimated full value of the tax base is a sizable $5.8 billion, or a favorable $95,000 per capita. The town's tax base exhibited resilience during the recent housing correction. After falling a moderate 6.7% in fiscal 2011 due to the 2009 revaluation, the tax base stabilized. Several commercial projects are underway in the town which should bolster prospects for tax base growth.

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. Public Finance Short-term Debt' (Dec. 9, 2013).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985040

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Contacts

Fitch Ratings
Primary Analyst
Patricia McGuigan
Director
+1-212-908-0675
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0608
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Patricia McGuigan
Director
+1-212-908-0675
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0608
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com