TEXT - Fitch affirms Manchester, NH 'AA+' GOs

Tue Nov 20, 2012 12:24pm EST

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Nov 21 - Fitch Ratings has affirmed the following ratings on the city of
Manchester, NH (the city):  

--Approximately $122 million general obligation (GO) bonds at 'AA+';
--Approximately $34 million school facilities revenue bonds at 'AA'. 

The Rating Outlook is Stable. 

SECURITY 

The GO bonds are backed by the city's full faith and credit and unlimited taxing
power. 

The school facilities revenue bonds are special obligations of the city, payable
from appropriations made by the city pursuant to a financing agreement which is 
not subject to termination for cause by either party.

KEY RATING DRIVERS

HISTORY OF STABLE OPERATIONS: General fund results have been generally positive 
for the better part of the last decade, contributing to reserves that provide a 
good cushion against unanticipated budgetary challenges. 

AFFORDABLE DEBT POSITION: Key debt metrics should remain in the average range 
based on modest future issuance plans. 

LOW FUNDED PENSION: The Fitch-adjusted funded status of the city's pension plans
approximates a low 60%, and risk to higher contributions can potentially erode 
budgetary flexibility. 

REGIONALLY IMPORTANT ECONOMY: Manchester serves as the anchor for a variety of 
economic activities in the northern New England area. Job growth has been 
minimal; however, unemployment remains well below the national average.   

CREDIT PROFILE

Manchester is located in Hillsborough County, New Hampshire, approximately 60 
miles north of Boston, Massachusetts. The city is bisected by the Merrimack 
River, and Interstates 93 and 293 intersect within the city. The city is the 
largest in northern New England with a fairly stable population of approximately
110,000.  

RETURN TO POSITIVE FINANCIAL PERFORMANCE

The general fund has recorded an operating surplus net of transfers in each of 
the prior three fiscal years, restoring $7.4 million of the $9.4 million draw on
fund balance that occurred in fiscal 2008 and 2009. The fiscal 2012 (unaudited) 
unrestricted fund balance totals $11.9 million or 8.8% of operating expenditures
and transfers out. 

The city's fiscal policy establishes a 5% rainy day reserve (which is included 
as part of the unrestricted fund balance noted above). Both the rainy day 
reserve and current actual reserves offer an adequate cushion against 
unanticipated budgetary pressures. This assessment particularly considers the 
city's long history of strong financial management. 

FISCAL 2013 BUDGET 

The fiscal 2013 budget increases the appropriation of fund balance to $2 million
from $1 million in fiscal 2012. Property taxes fund close to 70% of the budget. 
Collection rates have remained very sound throughout the recession and there is 
no material tax base concentration. Non-property tax revenues are budgeted to 
improve a modest $765 thousand from fiscal 2012. There appears to be some 
capacity to increase non-tax resources, particularly in the area of sanitation 
and refuse, should it become necessary in the future. 

On the expense side of particular note is the city's success in negotiating 
changes to its health care coverage plan that produced a significant $3.5 
million reduction in cost in fiscal 2013.

The general fund also budgets an annual dividend from the surplus cash flow of 
the municipal parking system, totaling $2.3 million in fiscal 2013. The city has
eliminated general fund subsidies to the recreation fund and lowered the fund's 
losses to $218 thousand in fiscal 2012 (excluding depreciation and 
amortization). The recreation fund has a cumulative net deficit of $4.8 million 
including a $5.8 million liability to the general fund from prior year's 
advances.  

VOTER APPROVED CAP ON TAXES AND SPENDING 

A voter approved amendment to the city charter limits growth in both 
expenditures and tax revenue to the average increase in the consumer price index
for the prior three years takes effect for the first time in fiscal 2013. 

Fitch believes the cap generally limits budgetary flexibility and will likely 
create difficult spending decisions for the city; however, the impact of the cap
on the city's creditworthiness is presently neutral. 

This assessment particularly reflects the exclusion of debt service expenditures
from the cap and the ability to override the cap with a two-thirds vote of the 
city's board of alderman. The city also retains the ability to increase certain 
service charges and licenses, which account for a considerable 13%-15% of 
general fund revenue. The current rating assumes the city will act in a manner 
that preserves a financial cushion consistent with internal policies at a 
minimum.   

DEBT EXPECTED TO REMAIN STABLE

Net direct debt per capita ($2,325) and as a percentage of market value (3%) is 
considered moderate by Fitch. Debt service is budgeted at $18.2 million or 13% 
of the general fund budget which Fitch considers only slightly above-average. An
additional $5 million in debt service charges on city GO bonds issued for the 
Manchester School District is paid out of the school district budget in fiscal 
2013. 

Capital needs center on vehicle replacement, with a cost of approximately $3 
million annually. The city does not expect to come to market with new debt of 
about $10 million-$15 million until the end of calendar 2013 for school and 
general government projects. Fitch does not believe this debt will impact the 
city's debt profile. 

Pension contributions to both city and state administered plans are budget at 
$12.9 million in fiscal 2013, consuming slightly more than 9% of spending. The 
funded status of the city plans is weak at 61% based on a Fitch-adjusted 7% 
investment rate of return. Funding of the state's pension system has declined 
significantly over the past decade; as of June 30, 2012 the state's pension 
system funded ratio was just 56.1%. 

Increased contributions required as a result of the low funding levels (and 
potentially, changes in return assumptions) could strain the city's budget, as 
pension costs are not excluded from the recently imposed tax and spending cap. 

REGIONAL ECONONOMIC IMPORTANCE

Manchester remains a significant presence within the northern New England 
economy. The city serves as a regional financial center, with leading employers 
including TD Bank and Citizens Bank (each with approximately 1,000 employees). 

Manchester is also home to several higher educational institutions including the
University of New Hampshire Manchester and the Massachusetts College of Pharmacy
and Health Sciences, with both currently undertaking large expansion projects in
the city. Manchester owns and operates the Manchester-Boston Regional Airport 
(rated 'A-' by Fitch), the sole airport in the state providing scheduled 
commercial jet service.  

The city's tax base fell 16.4% in fiscal 2012 following revaluation, while 
expanding a modest 1.1% in fiscal 2013. Management reports fairly stable 
permitting activity, though no major projects that would materially impact the 
city's tax roll. 

Manchester's 6.4% unemployment rate in August remains high relative to 
historical levels, but well below the national average of 8.6%. The city's 
employment base and the unemployment rate have remained somewhat stagnant the 
last several years. Per capita and median household income statistics 
approximate the national average.
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