NEW YORK, September 17 (Fitch) Fitch Ratings has affirmed the 'AA' rating on
approximately $4.1 million of outstanding general obligation (GO) bonds of the
Town of Groton, Connecticut (the town).
The Rating Outlook is Stable.
The GO bonds are backed by the town's full faith and credit and unlimited ad
valorem taxing ability.
KEY RATING DRIVERS
STRONG MANAGEMENT: The town benefits from sound management practices as
evidenced by their history of conservative budgeting, demonstrated ability to
adjust spending in response to revenue declines and generally stable financial
reserves and operating results.
FAVORABLE LONG-TERM LIABILITY PROFILE: The town's low long-term liability burden
is the key credit strength. The towns's 100% funding of actuarially required
contributions for both pensions and other post-employment benefit (OPEB) present
a low burden on the budget and limited near-term debt issuance plans will allow
the town to maintain its favorable debt position.
DECLINING EMPLOYMENT; HIGH CONCENTRATION: The town's employment base continues
to decline, despite marginal population growth, and there is a very high level
of concentration from both an employment and tax base standpoint.
FINANCIAL FLEXIBILITY MITIGATES ECONOMIC WEAKNESS: The town's financial
performance and flexibility significantly limit its overall credit risk to the
poor economic trends. The town has maintained a fairly stable and adequate level
of financial reserves over an extended period while demonstrating a conservative
approach to budgeting. Operations are largely funded from property taxes, which
are not subject to a limit or cap.
Fundamental shifts in the town's top taxpayers/employers, due to the high level
of concentration that exists, could pressure the town's finances and rating. The
Stable Outlook reflects Fitch's expectation for continued prudent budgetary
management supported by the town's adequate level of revenue raising
The Town of Groton is located in southeastern Connecticut with a 2012 population
of 39,896. The Thames River is adjacent to the town on the west and the Long
Island Sound is located directly to the south, providing the town great access
to the local waterways.
HIGHLY CONCENTRATED ECONOMIC BASE
The town's economy is heavily influenced by the sizable presence of the Naval
Submarine Base New London (the base), General Dynamics' Electric Boat
Corporation (EB), and Pfizer (rated 'A+' by Fitch). Collectively these firms
employ 19,620 in the town (as of June 30, 2012), while Pfizer and EB account for
a high 15% and 5.5% of the town's tax base, respectively.
Each of these entities has a long-standing presence in the town and has invested
significantly in plant infrastructure. However, recently EB announced the
decision to let go of up to 300 blue collar employees due to the termination of
a federal repair contract for the U.S.S. Miami. Pfizer has opted to demolish a
large office building that generates $2.2 million in annual property tax revenue
(the building is expected to be removed from the grand list effective fiscal
2016). Despite the loss of this building and a staff reduction in 2011, Pfizer's
Groton office remains its largest research and development center.
The employment picture for both the town and New London County remain poor, with
consecutive years of decline dating back to 2008 and 2009, respectively.
Year-to-date employment is down about 2% for both the town and county, and the
town's July unemployment rate of 9.1% was above that of the state's 8.3% and
nation's 7.7%. Continued employment base weakness could pressure the rating over
time, given a potential to stress tax base valuation and resident income
metrics. Median household income is presently approximately 15% higher than that
of the nation. Per capita income levels for the town are also above the national
CONSISTENT FINANCIAL RESULTS
In Fitch's view the town's financial performance and flexibility significantly
limit its overall credit risk to the poor economic trends noted above. General
fund operating results over the prior decade have generally been positive, with
unreserved or unrestricted fund balance maintained between 5% and 10% of
operating expenditures and transfers out.
The town ended fiscal 2012 with a slight operating deficit (after transfers) of
$443,351 (or 0.3% of spending), mostly due to lower than budgeted state and
federal aid. Property taxes fund 63% of general fund operations. The
unrestricted fund balance of $12.7 million (or 10.1% of spending) continues to
provide a satisfactory cushion against unforeseen spending needs or emergencies.
The town has a policy that requires an unassigned fund balance equal to at least
7.5% of general fund expenditures (reserves in excess of 7.5% can be
appropriated as a revenue source in the subsequent year's budget). Another
policy dedicates a certain level of annual funding to a capital reserve fund,
which currently has a balance of $1.4 million which in the event of an emergency
could be moved back to the general fund to help cover operating expenses.
In Fitch's view the town has a good deal of revenue raising flexibility that
positions it to offset tax base declines or other unforeseen operating
challenges. The town's tax rate is regionally competitive and the town has an
unlimited ability to raise the tax rate to meet operating needs.
EXPECTATIONS FOR FISCAL 2013 ARE POSITIVE
Preliminary fiscal 2013 results indicate a $2.2 million operating surplus,
mostly due to higher than budgeted property tax receipts and federal aid, and
lower than budgeted spending on town operations. Unassigned fund balance is
expected to be roughly 9.4% of general fund spending.
FISCAL 2014 BUDGET MAINTAINS RESERVE POLICY COMPLIANCE
The fiscal 2014 budget is balanced with a planned $2 million use of fund balance
for tax relief purposes (reflecting the portion of unassigned fund balance above
7.5% as per town policy). Due to reductions in the contribution to the capital
reserve fund and reduced debt service payments due to a February 2013 refunding
issue, the adopted fiscal 2014 budget is less than the fiscal 2013 budget. The
town is budgeting for $1.3 million of OPEB spending above the paygo amount,
which in Fitch's view theoretically could provide additional budget flexibility.
The fiscal 2014 budget also includes a small contingency of $350,000.
LOW LONG TERM LIABILITY BURDEN
The town's total debt burden is low at $1,229 per capita and 1% of market value.
Principal amortization is above-average with 64% to be retired within 10 years.
An additional debt issuance of $9.4 million is expected in early 2014, but
should not have a material effect on the town's low debt ratios.
All town employees, excluding certified board of education (BOE) members,
participate in the town's single employer defined benefit plan. The plan's
annual required contribution (ARC) represents a low 2% of total governmental
fund spending (excluding capital). The plan is well-funded at 79.7% and assumes
a discount rate of 8%. Using Fitch's 7% discount rate assumption the ratio
declines to a still satisfactory 73.3% and the unfunded actuarial accrued
liability a fairly reasonable amount in absolute terms. Board of Education
employees participate in the State Teachers' Retirement System, a cost-sharing
pension plan, for which the state is solely responsible for all contributions.
OPEB liabilities are manageable. The town prudently contributed more than the
full OPEB ARC in 2012 and 2013 and the total unfunded liability is less than 1%
of market value. Carrying costs for debt service, pension, and OPEB totaled a
low 11% of total governmental fund spending (excluding capital) in 2012.
Fitch Ratings, Inc.
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New York, NY 10004
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In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, Zillow.com, Trulia.com, IHS Global Insight.
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