NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on the City of New Haven, CT's (the city) general obligation (GO) bonds:
--Approximately $510 million outstanding GO bonds downgraded to 'A' from 'A+'.
The Rating Outlook remains Negative.
SECURITY
The bonds are general obligations of the city backed by its full faith, credit, and unlimited taxing power.
KEY RATING DRIVERS
WEAKENED FINANCIAL FLEXIBILITY: The rating downgrade reflects the city's limited financial flexibility as reserve levels remain weak. A current year deficit is projected, further weakening liquidity.
STATE BUDGET UNCERTAINTIES: Future challenges due to uncertainty surrounding the state budget cuts could dramatically affect recurring revenue for the city.
ABOVE AVERAGE DEBT RATIOS: The city's debt ratios are above average but are expected to remain stable as new issuance is expected to replace rapidly amortizing existing debt.
HIGH FUTURE RETIREE COSTS: Although the city has historically funded 100% of its pension actuarially required contribution (ARC), pension and other post employment benefit (OPEB) liabilities are high.
INSTITUTIONAL PRESENCE DRIVES ECONOMY: New Haven's economy benefits from the presence of higher education and healthcare institutions, including Yale University and Yale-New Haven Hospital. These institutions continue to attract development and investment from biotechnology, pharmaceuticals and life-science companies.
BELOW AVERAGE WEALTH LEVELS: Wealth levels continue to trend below state and national averages, and unemployment rates are high even with a declining labor force.
RATING SENSITIVITIES
DETERIORATION IN LIQUIDITY LEVELS: Results faring below projections over the next fiscal year could put additional downward pressure on the rating.
STATE AID CHALLENGES: Management's ability to address any potential loss in state aid and growing employee expenses with recurring revenues will be paramount to the rating.
CREDIT PROFILE
New Haven is located on the north shore of the Long Island Sound and is about 75 miles north of New York City.
LIMITED FINANCIAL FLEXIBILITY; RESERVES REMAIN LOW
The city
continues to experience pressure on its financial operations. For fiscal
2012, the city experienced a general fund operating deficit after
transfers of $8 million, reducing its unrestricted fund balance to a low
$3.8 million or 0.7% of spending from $9.8 million, or 1.9% of spending,
the prior fiscal year. The bulk of the decline is due to budgeted union
concession savings that were not realized fully or were realized later
than anticipated in the fiscal year due to lengthy union negotiations.
Other factors contributing to the use of reserves include higher than
anticipated medical benefit and police overtime costs, as well as lower
than expected building permits, parking fees, and state college and
hospital payment-in-lieu-of-tax (PILOT) fees.
PROJECTED FISCAL 2013 DEFICIT
The adopted $486 million fiscal 2013 general fund budget was a 2.4% increase over the fiscal 2012 budget. No tax increase was implemented but additional property tax revenue of $7.5 million was assumed due to tax base growth. General operating projections through February show a $3.7 million deficit which if realized would essentially deplete unrestricted general fund reserves.
The projected deficit stems primarily from a reduction in state PILOT fees which were unknown at the time of budget completion and a reduction in locally generated PILOT fees. Management identified these shortfalls early in the fiscal year and has made efforts to reduce the projected shortfall through expenditure controls, but unreimbursed costs for Superstorm Sandy and winter snowstorms have caused additional expenditure pressure. Management has indicated it will continue to monitor expenditures and expects to be able to partially reduce the existing deficit. Fitch believes this is reasonable based on the size of the deficit in relation to the city's overall budget but will continue to monitor the city's progress.
Cash flow borrowing is not expected to be needed as the city plans to resort to interfund borrowing to get it through its most difficult time of the year which is now through mid-May. Fitch believes this is reasonable based on its review of the city's cash flow projections.
FISCAL 2014 BUDGET PRESSURES
City officials have identified a preliminary $12.3 million budget gap assuming state aid remains flat to the reduced fiscal 2013 level. The gap reflects one-time asset sale revenues from the prior year, unrealized prior year budgeted employee concessions and increases year over year in employee and debt costs.
Additional gaps are projected of $14 million, assuming the state eliminates revenue sharing to the city, and an additional $15 million if a proposed change in the car tax aid provided by the state is enacted. In the worst case, the gap would be $42 million or 8.6% of fiscal 2013 general fund spending. The uncertainty of state budget cuts next fiscal year presents a fiscal challenge to the city especially with its limited reserve levels.
The mayor has submitted a preliminary fiscal 2014 budget proposal to the city council for consideration which included three options that reflect the various levels of potential state budget cuts. Each option includes an increase in the property tax levy but no net reduction in expenditures.
The mayor's proposed legal budget assumes the middle scenario of an elimination of revenue sharing and an approximate 12% property tax rate increase to cover the projected $26 million gap. The city is required by statute to approve the budget by June 1, one month prior to the state's required finalization date. Fitch will continue to monitor the progress of state budget decisions and the city's response.
On a positive note, management has made strides in achieving employee contract concessions with certain of its bargaining units, including police, resulting in pension plan changes and medical benefit cost savings. In addition to modest budget relief, pension and OPEB valuations will improve. Negotiations with its other bargaining units are ongoing.
INTERNAL SERVICE FUND DEFICITS
The city's medical and self-insurance fund ended fiscal 2012 with an aggregate deficit of $19 million, including $8.4 million of case reserves for outstanding litigation. The city will use $6 million of the proceeds from its August 2012 bond issue to cure a portion of the self-insurance fund deficit and plans to debt finance an additional $6 million of the deficit in equal increments over three years beginning in fiscal 2014. In addition, it plans to continue to make regular appropriations from its operating budget and increase premiums to reduce these internal service fund deficits.
ABOVE AVERAGE DEBT BURDEN
Overall debt levels, net of state school construction reimbursements, are above average at approximately $3,749 per capita and 5.6% of market value. Debt levels are expected to remain stable over the next few years as additional planned debt will be offset by the very rapid amortization of existing principal (78% in 10 years).
The city's fiscal 2013-2017 capital improvement program (CIP) totals $363.4 million with 47% projected to be funded by state and federal sources. Actual spending is anticipated by the city to be less as lower priority projects are expected to be pushed back or cancelled. The current plan anticipates the delivery of $30 million to $50 million annually in new money debt including school related issuances as well as the potential borrowing to fund the operating deficit in the self-insurance fund.
LOW PENSION FUNDING LEVELS
Pension funded levels are low despite the city continuing to fund 100% of its ARC. The city maintains two single-employer defined benefit plans for general city employees and police and fire personnel. The most recent actuarial valuation as of June 30, 2011 shows the funded levels for the plans at 46% (general) and 50% (police and fire), using the plans' 8.25% assumed investment return rate. Adjusting to Fitch's more conservative 7% discount rate, the funded levels are a low 40% and 44%, respectively. Pension costs represent a slightly high $41.2 million, or 8.5% of the fiscal 2013 budget. Notably, the increase in fiscal 2014 pension costs will only be $210,000 as opposed to the original actuarially projected $2.7 million due to recent contract settlements reached with certain unions. Fitch anticipates the recent changes will also improve funded levels going forward.
The city's unfunded OPEB liability was $444 million as of July 1, 2011, the most recent data available. The city has set up an irrevocable trust to fund future obligations, but currently funds obligations on a pay-as-you-go basis. The city contributed $22.5 million in fiscal 2012, 63% of the ARC and 4.4% of fiscal 2012 general fund spending.
Total combined carrying costs for debt service, pension contributions and OPEB pay-go represent a moderate 19.8% of fiscal 2012 governmental spending, less capital.
MIXED SOCIOECONOMIC INDICATORS
New Haven serves as a regional center for higher education, health care, transportation and the arts. The presence of the city's top two employers, Yale University and Yale New Haven Hospital, provide stability to the economy and continue to attract development and investment from biotechnology, pharmaceuticals and life-science companies. Significant new developments have contributed to the city's tax base growth and a number of projects are in the pipeline. These projects are expected to increase employment opportunities and continue to attract new businesses to the city. The most recent property revaluation, effective October 2011, showed an increase in the city's market value of 16% to $8.6 billion. Net taxable values as of October 2012 were up 1.5%.
Several economic indicators remain below average despite the recent development. The city's unemployment rate declined slightly to 12.4% in January from 12.5% the prior year, although total employment decreased by 3.1% in the same period. Wealth levels are below state and national averages as has historically been the case.
Additional information is available at www.fitchratings.com.
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 the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating
Criteria' (Aug. 2012);
--'U.S. Local Government Tax-Supported
Rating Criteria' (Aug. 2012).
Applicable Criteria and Related Research
Tax-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S.
Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789112
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