Fitch Rates Norwalk, CT's Series 2016 GOs 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'AAA' rating to the following city of Norwalk, CT general obligation (GO) bonds:

--$22,000,000 GO bonds, issue of 2016.

The bonds are scheduled to sell competitively on June 30. Proceeds are being used to support various city and school related capital improvements.

In addition, Fitch affirms its 'AAA' Issuer Default Rating (IDR) on the city and its 'AAA' rating on the city's outstanding series 2009E, 2010E&F, 2011B, 2012B, 2013, 2014 and 2015 GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are backed by the full faith and credit and unlimited taxing power of the city.

KEY RATING DRIVERS

The 'AAA' IDR and GO ratings reflect Fitch's expectation for the city of Norwalk to maintain healthy financial flexibility throughout economic cycles, consistent with a history of strong operating performance and sound reserves. The city's strong financial profile reflects a wealthy property tax base, modest expenditure growth and a demonstrated ability to reduce expenditures during economic downturns. Fitch expects long-term liabilities to remain moderate based on manageable capital needs and well-funded city-managed pension plans.

Economic Resource Base

Norwalk is an affluent city located on the Long Island Sound between Bridgeport and Stamford and is roughly 50 miles northeast of New York City. Its 2015 population of 88,485 is up 3.3% since 2010.

Revenue Framework: 'aaa' factor assessment

Norwalk's primary source of revenues is property taxes, and general fund revenue growth of about 4.4% annually over the past 10 years has exceeded both U.S. GDP and CPI for the same period. Growth in revenues was derived from a combination of tax rate increases and tax base growth. Fitch expects revenue growth to continue to be solid, as a number of new developments are either underway or proposed and are expected to improve the tax base. Local governments in Connecticut have an unlimited taxing authority.

Expenditure Framework: 'aa' factor assessment

The natural pace of spending growth is expected by Fitch to be in line with revenue growth over time. Carrying costs for long-term liabilities claim a moderate proportion of governmental spending. The city has adequate controls over employee headcount and wages, and has demonstrated the flexibility and willingness to cut spending during economic downturns.

Long-Term Liability Burden: 'aaa' factor assessment

Fitch anticipates Norwalk's long-term liability burden to remain moderate based on a manageable capital plan and history of full funding of its pension actuarially determined contribution (ADC). Norwalk's debt and unfunded net pension liabilities are a low 5.3% of personal income

Operating Performance: 'aaa' factor assessment

Fitch expects the city to manage through periods of economic decline while maintaining a sound financial cushion on the basis of its superior level of budgetary flexibility and history of careful financial management.

RATING SENSITIVITIES

STRONG MANAGEMENT PRACTICES: The rating is sensitive to shifts in the city's strong financial management practices and maintenance of fundamental financial flexibility.

CREDIT PROFILE

Health care, financial and professional services, and retail sectors drive the city's economy. The city's largest private employer with 1,534 employees is Norwalk Hospital, a teaching facility for the Yale School of Medicine. The second largest employer is Cablevision (1,200) followed by General Electric Company, Inc. (GE; 1,000). GE has announced that it is moving between 500-600 jobs from the Fairfield, CT headquarters to its leased offices in Norwalk in connection with the move of its corporate headquarters from Fairfield to Boston over the next three years.

Building permit valuations have exceeded $250 million annually in fiscal years 2014-2016, which bodes well for future tax base growth. Though little vacant land remains within the city, mixed-use redevelopment is occurring in the urban corridors. Planning is also well underway for an upscale 700,000-plus-square-foot mall at the intersection of I-95 and Route 7 with expected groundbreaking later this summer.

Wealth levels are above average as reflected in a market value per capita estimated at a high $196,000 based on the fiscal 2017 market value (MV) of $17.3 billion. While property values declined 7.7% in the tax base revaluation for fiscal 2015, Norwalk's values fared better than neighboring communities' and has experienced marginal growth of 2.3% since then. Norwalk's unemployment rate of 4.8% (April 2016) is lower than the state average (5.7%) and a slight improvement from 4.9% a year ago.

Revenue Framework

The city's primary source of revenues is derived from property taxes representing approximately 89% of budgeted revenues. Management has made regular increases in its tax levy to meet expenditure growth and management has an independent legal ability to raise taxes without limit. Exposure to state aid declines is minimal as only 5% of operating revenues are from state sources.

Fitch expects revenue growth to be sound even without policy action due to the strength in the city's economy, reflective of planned new development in residential, retail and commercial properties.

Expenditure Framework

Norwalk's spending is primarily for education and city employee salary and benefits. Expenses are expected by Fitch to grow in line with revenues to slightly above without policy action. Fixed costs for debt service pension and OPEB represent a manageable 13% of fiscal 2015 spending. Management has established an OPEB trust with a balance of $55 million at April 2016 (approximately 21% of its OPEB liability) and contributed 76% of its OPEB annual required contribution in fiscal 2016, or $15.3 million, with future budgets to include an annual increase of $500,000.

The city has the ability to reduce expenses tied to it services. Management has the ability to reduce non-public safety staff at any time if necessary. Union contracts are subject to arbitration but a decision may be rejected by a two-thirds vote by city council. Arbitration decisions are required to take into consideration the financial capability of the employer.

Long-Term Liability Burden

Long-term liabilities for debt service and unfunded pensions represent a low 5.3% of personal income. Fitch expects liability levels to remain low given the moderate borrowing plans, rapid amortization of existing debt and the city's commitment toward full funding of its annual pension contribution. The city's charter requires the city to fully fund the annual actuarially determined contributions for pensions, a practice Fitch views as favorable to credit quality.

The city's four pension plans are funded at a Fitch-estimated 83% using a 7% investment return rate and the aggregate estimated net pension liability, based on this return, is $114.7 million as of June 30, 2015. Overall debt/MV is estimated at 1.5% of fiscal 2017 MV.

The fiscal 2017-2021 capital improvement plan totals a moderate $235 million and proposes debt financing of $179 million with a focus on public works, school and sanitary sewer investments.

Operating Performance

Fitch expects the city will continue to maintain strong reserve levels throughout an economic cycle given its historically stable revenue performance, high degree of inherent budget flexibility, and demonstrated commitment to maintaining sound reserves within policy levels of 7.5% -15% of revenues.

The city has experienced steady growth in revenues largely driven by consistent increases in the property tax rate that have supported surplus operations over the past five fiscal years and buildup of reserves. At fiscal-end 2015, unrestricted general fund balance increased by $7.3 million to $44.8 million (13% of spending) due to continued conservative budget assumptions, higher than anticipated revenues and a one-time re-allocation of $3.8 million previously held for potential appeals, based on an accounting change. Projections for fiscal-end 2016 reflect another net-operating surplus after transfers of $2.3 million reflecting positive revenue variances and conservative spending estimates.

The fiscal 2017 general fund budget of $337 million is up 3.2% compared to the prior year and includes a $5.5 million or 1.9% increase in the total tax levy as a result of a 1.5% increase in taxable values and a modest 0.3% increase in the mill rate.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007813

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Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1-212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan
Director
+1-212-908-0538
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Parker Montgomery
Analyst
+1-212-908-0356
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com