TEXT - Fitch rates Wilmington, Delaware GOs 'AA-'
Feb 22 - Fitch Ratings assigns an 'AA-' rating to the following Wilmington, Delaware (the city) general obligation (GO) bonds: --$37.3 million GO bonds, series 2013A. The bonds are expected to sell via negotiation on Feb. 28, 2013. Bond proceeds will be used to refund certain maturities of the city's outstanding GO bonds for upfront savings. In addition, Fitch affirms the following rating: --$287 million GO bonds at 'AA-'. The Rating Outlook is Stable. SECURITY The bonds are a general obligation of the city, for which its full faith, credit, and unlimited taxing power are irrevocably pledged. KEY RATING DRIVERS VOLATILE FUNDING SOURCES: Continued maintenance of above-average reserves is a point of paramount significance, as the city's revenue base is largely dependent on economically sensitive taxes derived from earned income, business profits, and real estate transactions. PENSIONS INADEQUATELY FUNDED: Pensions are underfunded despite the city fully funding its annual required contribution (ARC). Annual costs currently represent an affordable portion of total government spending but are expected to grow as the city pays down the unfunded liability. DUAL ECONOMIC PILLARS: The city remains one of the nation's largest banking centers, and a sizeable health care and pharmaceutical presence lends stability to the regional economy. SUBPAR ECONOMIC AND WEALTH INDICATORS: Economic indicators are sluggish and include stubbornly high levels of unemployment, below-average wealth levels, and a high incidence of poverty. MODERATE DEBT PROFILE: Overall debt levels are moderate. The debt service burden on total governmental funds is manageable and should remain affordable given the absence of additional debt plans. RATING SENSITIVITIES REDUCTION IN RESERVE LEVELS: Reserves provide considerably less cushion than prior to the economic downturn; as a result, any future fund balance use could place downward pressure on the rating. CREDIT PROFILE The city of Wilmington is located on the western bank of the Delaware River in the northeast corner of the state of Delaware, almost at the mid-point between New York City and Washington, D.C. The 2011 estimated population of 71,305 shows a modest increase since the 2010 census after a gradual decline from the 2000 census. FAVORABLE OPERATIONS Budget tightening, debt restructuring and growth in revenues have allowed the city to record strong operating surpluses in fiscal 2011 and 2012. The fiscal 2012 unrestricted fund balance improved to $35.3 million or 25% of spending. The city's formal reserve fund balance policy is equal to 10% of budgeted expenditures. The fiscal 2012 budget was adopted with no fund balance appropriation or tax rate increase. Year-end results reflect an operating surplus after transfers of approximately $7.4 million or 5.3% of spending. Wage tax revenues, the city's largest revenue source, were 11% over budget, reflecting the city's audit and collection initiative, improved economic conditions, and conservative budgeting. Notable positive variances were also recorded in real estate transfer revenues, from the sale of a large building, and licenses and permits revenues were up due primarily to increased construction. MODEST USE OF RESERVES ANTICIPATED IN FISCAL 2013 The fiscal 2013 budget increases 2.6% or $3.6 million year-over-year. The increase is the result of a sharp rise ($2.3 million) in the pension contribution due to recent market losses and the pension systems' lower investment return assumption. Debt service increased $1.2 million reflecting a full year of principal and interest on the city's November 2011 bond issuance, and the costs of several public officers, previously funded by a state grant, are being absorbed into the general fund budget at a cost of $329,000. To offset these ongoing expenditure increases, the city has appropriated $1.96 million of fund balance in fiscal 2013, and continues to reduce spending in other areas by consolidating agencies and streamlining services. Expected property tax increases will help cover higher ongoing spending needs beginning in fiscal 2014, although the forecast rapid growth in pension contributions may remain a source of budgetary pressure going forward. Year-to-date operations show a projected $1.5 million positive budget variance in wage tax revenues, and expenditures are tracking close to budget. Management is estimating a modest use of fund balance at year-end. The current rating level assumes city fiscal decisions to maintain healthy reserves in spite of budgetary pressures, including from pensions. PENSION COSTS ARE PROJECTED TO PRESSURE FINANCIAL OPERATIONS Substantially all of the city's employees participate in one of five closed single-employer plans or the cost-sharing multi-employer state plan. For the city's own plans, the Fitch-adjusted aggregate unfunded actuarial accrued liability (UAAL) of $185.2 million is equal to a high 3.5% of estimated market value, and the funded ratio is very low at 48.3%. A significant portion of the unfunded liability is driven by the firefighters and police plans, as a result of past unfunded benefit enhancements. Currently pension costs account for an affordable 8% of total governmental spending (less capital related funds). However, according to the city's multi-year forecast, pension costs are expected to double by fiscal 2017 due to the lowering of the investment return assumption by 50 basis points, among other factors. Fitch will monitor the funded status of the plans and expects the city to continue fully funding its annually required contributions. DEBT RATIOS ARE EXPECTED TO REMAIN MODERATE The debt burden is expected to remain moderate as modest tax base growth offsets the limited bonding assumed in the $70.7 million fiscal years 2013 - 2018 general government capital improvement plan. Amortization is average, at 62.6% of principal retired within 10 years. Fiscal 2013 debt service is budgeted at 8.9% of general fund spending, an increase from past levels due to a debt restructuring in 2010. Bonds ($23.3 million) issued by the Wilmington Parking Authority, a discretely presented component unit, are included in the city's debt statement based upon its guarantee to cover debt service in the event that resources of the authority are insufficient, a guarantee that has been called upon in prior years due to less than sum-sufficient coverage by parking receipts. Capital projects relating to the water/sewer fund are funded by bonds with a GO pledge though paid by revenues of the enterprise system. Fitch views the bonds as self-supporting, after the city strengthened operations by implementing a 16% rate increase during fiscal 2012; previously, narrow operations led to the need to borrow from two internal service funds and the general fund. Fitch will continue to monitor that the bonds remain self-supporting and that the water/sewer fund does not impinge on general fund operations. FINANCIAL SERVICES DRIVE ECONOMY Wilmington's economy benefits from a business climate attractive to banking and related business services, as well as pharmaceuticals. There are signs of recovery in the financial services industry after the volatility of the recent financial crisis. Capital One Financial Corp. will add 500 well-paying positions to the city as part of its acquisitions of ING Direct, another Wilmington based bank. Citibank will relocate about 155 jobs to the city. Considerable pharmaceutical and health care presences lend some stability to the economy. DuPont and AstraZeneca Inc. N.A. are two of the area's largest employers at 8,100 and 4,500 employees, respectively. The Christiana Health Care System continues its $210 million expansion, which is slated to create almost 600 permanent positions by 2014. The city is located mid-way between New York City and Washington D.C. Access to major transportation networks as well as undeveloped waterfront tracts have encouraged residential and commercial development in the Riverfront and downtown areas, and the city's urban renewal efforts also target other neighborhoods in need of redevelopment. After a 2% decline in population over the past decade, the estimated 2011 population shows a 0.6% year-over-year increase. Economic indicators generally remain below average, and there are pockets of the city that continue to suffer considerable levels of poverty and blight. Wilmington's unemployment rate consistently trends higher than the state and national average, as non-city residents hold many of the lucrative positions located within city limits. As of December 2012 the unemployment rate was 10.2%, down slightly from 10.3% a year prior, reflecting a decline in the labor force. Per capita money income lags behind the state's and nation's average at 86.3% and 91.7% respectively, and median household income is well-below state and national levels, at 65.8% and 74%, respectively. The poverty rate is nearly double that of the nation.
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