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
--$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.
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
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.
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
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
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
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
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
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