TEXT - Fitch rates Wilmington, Delaware GOs 'AA-'

Fri Feb 22, 2013 12:18pm EST

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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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