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

NEW YORK--(Business Wire)--
Fitch Ratings has assigned a 'BBB+' rating to the city of
Waterbury, Connecticut's approximately $320 million general obligation
(GO) pension obligation bonds (POBs), series 2008. The bonds are
expected to sell via negotiation on Mar. 28, with proceeds financing a
portion of the city's unfunded pension obligation. In addition, Fitch
affirms the rating on the city's approximately $80.5 million of
outstanding GO bonds at 'BBB+' and the rating on the city's
approximately $25.7 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 POBs, Waterbury reduces its unfunded pension
liability but increases its debt levels. Overall net debt rises to a
high $4,074 per capita or 5.8% of TMV from a below average $1,091 per
capita and 1.6% of TMV. The city projects annual cash flow savings of
between $4 million-$5 million on the combined pension ARC and debt
service payments, 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.

POB proceeds will bring the system to roughly 70% funded from a
mere 12.4% before this issuance. The city's OPEB liability totals
$604.3 million, or a high 8% of TMV. 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.

Recent rating upgrades reflected the city's prudent 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 Dec. 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, that
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 an up to $2 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.

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings, New York
Ryan A. Greene, 212-908-0315
Amy R. Laskey, 212-908-0568
or
Media Relations:
Cindy Stoller, 212-908-0526

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