TEXT-Fitch rates New London, Conn. GOs 'AA-', BANs 'F1+'
Nov 13 - Fitch Ratings assigns an 'AA-' rating to the following New London, CT (the city) general obligation (GO) bonds: -- $11,595,000 GO bonds, issue of 2012, Lot C. In addition, Fitch assigns an 'F1+' rating to the following GO bond anticipation notes (BANs): --$9,960,000 GO BANs, Lot B --$3,265,000 GO taxable BANs, Lot C The bonds and notes are scheduled to price Nov. 15 via negotiation. In addition, Fitch affirms the 'AA-' rating on the city's approximately $23.5 million outstanding Fitch-rated GO bonds and its 'F1+' rating on the city's $5.4 million outstanding BANs. The Rating Outlook is Negative. SECURITY The bonds and notes are a full faith and credit obligation of the city backed by its unlimited taxing power. KEY RATING DRIVERS WEAKENED FINANCIAL CONDITION: The Negative Outlook reflects the continued operation pressure evident in a greater than projected operating loss estimated for fiscal year ending 2012 and sharp reduction in liquidity levels. Reserves are projected to decline to levels inconsistent with the city's current rating. Fitch remains concerned about management's ability to replenish reserves in a timely manner to a more adequate level. STABLE ECONOMIC BASE: Military and defense related employment remains important to the local economy and the presence of health care and higher education institutions lend stability to the economy. WEAK DEMOGRAPHICS: The city's economic indicators are below average evidenced by weak income levels and continued employment losses keeping the unemployment rate elevated. MANAGEABLE LONG-TERM LIABILTIES: The city's overall debt levels are moderate and should remain unchanged given the above average principal amortization and the city's modest debt issuance plans. Pensions are well funded but other post employment benefits (OPEB) pose a moderate level of risk. FUTURE MARKET ACCESS: The 'F1+' short term rating on the BANs reflects the city's overall credit characteristics, unlimited taxing powers and the expected repayment of $8.4 million of Lot C & D BANs by the city from state reimbursements received for school construction projects sufficient to retire the BANs when due. WHAT COULD TRIGGER A RATING ACTION RESTORATION OF FINANCIAL CUSHION: The city's historic level of financial flexibility served as a key credit offset to the weak economy. A return to positive operations and meaningful progress in restoring available reserves in the near term is fundamental to maintaining the current rating level. CREDIT PROFILE New London is located approximately 120 miles northeast of New York City and 100 miles southwest of Boston and has a 2010 population of 27,620, up 7.6% from 2000. STRUCTURAL IMBALANCE CAUSES DECLINE IN RESERVE LEVELS The city reported a $1.3 million general fund operating deficit for the fiscal year ending June 30, 2011. The deficit was a result of shortfalls in revenue, particularly in property tax collections and investment income. In addition, expenditures in the Fire Department and Public Works Department were greater than budgeted. The city implemented GASB 54 reporting in fiscal 2011 and reported an unrestricted general fund balance (sum of committed, assigned and unassigned) at June 30, 2011, of $5 million or 6.1% of spending, a decline from $6.3 million or 7.9% of unreserved fund balance in 2010. The town transitioned from a town manager form of government to the strong mayor form that took effect with the local election held in November 2011. The new mayor, concerned about the estimates in the fiscal 2012 budget, requested an assessment of the finances by the city's financial advisors and auditors. The assessment revealed that for fiscal year ending June 30, 2012, the city was facing a sizable structural deficit estimated at $4.2 million in December 2011. This estimate was subsequently revised to $3.2 million in March of 2012, but according to management, distressed city aid and school grants from the state were less than anticipated by approximately $1.1 million. Town management now estimates further declines and the general fund unrestricted balance is projected to drop $4.5 million to a low $501,000 or less than 1% of budgeted expenditures. The town reports the cause of the latest revision as revenues over estimated, particularly in property tax collections, investment income, and for intergovernmental revenues. In addition, certain departmental expenditures were greater than budgeted. Management took remedial action to reduce expenditures including a non-essential hiring freeze and reductions in full-time positions, but the shortfall in budgeted revenues was the primary driver for the deficit. Management prudently approved a 5.1% tax increase ($2.3 million in additional revenues) for fiscal 2013 and budgeted $2 million less in expenditures compared to fiscal 2012 spending to help mitigate the structural imbalance. The fiscal 2013 budget also assumes approximately $500,000 in refunding savings from the 2012 Lot C bonds. Management has indicated that further expenditure cuts, including additional staff reductions, can be made if necessary to help maintain balanced operations. Potential long-term savings are being explored especially with respect to employee health care costs and staffing requirements. Fitch has reviewed fiscal 2013 cash flow projections which appear reasonable and show cash low points in the two months (June and December) prior to tax bills being distributed. The cash flow schedule assumes use of a combination of pooled special revenue, debt service, and internal service fund monies of $7.1 million if needed. Also mitigating this concern is the city's strong cash and investment position in its enterprise fund of $11.9 million (unaudited FYE2012) available for internal borrowing if approved by town council and the ability to issue tax anticipation notes, if necessary. Rebuilding of the city's reserve was not contemplated in the fiscal 2013 budget, consistent with Fitch's expectations, but will be considered by management beginning in fiscal 2014. Progress in restoring adequate fund balance levels is essential to Fitch maintaining the city's current bond ratings. DIVERSIFIED ECONOMY WITH SIGNS OF DEVELOPMENT Over the last 20 years the local economy has diversified away from a heavy reliance on defense-related employment to the service-related sectors. The presence of health care and higher education institutions lend stability to the economy. Major employers include Lawrence & Memorial Hospital and Connecticut College. The U.S. Coast Guard Academy is a major presence in the city with approximately 900 military and civilian employees. In 2010, Pfizer consolidated and relocated its research group from the city to its facility in Groton, CT. Electric Boat, a division of General Dynamics, purchased Pfizer's plant and is transforming the facility into a design center for the U.S. Navy's next generation of submarines and expects to employ up to 2,500 individuals over the next few years. Electric Boat is the largest taxpayer at approximately 3.1% of the city's tax base. BELOW-AVERAGE SOCIOECONOMIC INDICATORS Continued employment losses keep the city's September 2012 unemployment rate elevated at 11.4%, up from 10.7% in September 2011 and considerably above the state and national rates of 8.9% and 7.8%, respectively. Income levels are below state and national levels. The city's 2010 median household income was 64% of the state and 84% of the national level. The below-average socioeconomic profile is skewed somewhat due to the large student population as the city is home to Connecticut College, Mitchell College, and the afore-mentioned Coast Guard Academy. MANAGEABLE LONG-TERM LIABILITIES Debt levels are moderate, with overall debt equal to $2,148 per capita and 2.6% of market value. Fitch believes the city's debt burden will remain manageable due to its limited borrowing plans and a rapid amortization rate of 68% in 10 years. The city administers a contributory and non-contributory single-employer pension plan which provides benefits primarily to non-teacher employees. The non-contributory plan has been closed to new hires since 1971 and is not prefunded. The city made contributions of $746,000 in fiscal 2011 to cover expenses of this plan. The city made contributions of $790,000 in fiscal 2012 to its contributory plan which equaled 99% of its annual required contribution (ARC). The unfunded liability for the contributory plan was $2.1 million and was well funded at 90%, based on Fitch's conservative investment rate of 7%, as of the plan's June 30, 2009 valuation (the most recent available). Required contributions for both plans are less in fiscal 2013 due to a number of employee retirements and employees' decision to switch from a defined to a non-defined contribution plan. The city also established separate single-employer defined contribution plans for firefighters and certain other employees. Its annual contributions in fiscal 2011 totaled $524,309. Contribution levels for both the city and employees are set by plan provisions which are established by city council. Police union members participate in the state's Municipal Employees Retirement System. The city makes 100% of its ARC which totaled $981,315 in fiscal 2011. The city's teachers participate in the state's teacher plan for which the city has no obligation. Total pension payments made in fiscal 2011 of $3.04 million equaled a moderate 3.7% of general fund spending. Carrying costs including debt service rise to a still manageable 10% of fiscal 2011 spending. 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