NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AAA' to the following general obligation (GO) bonds to be issued by the Town of Manchester, Connecticut (the town):
--$27,415,000 GO refunding bonds, 2015 series A.
The bonds will be sold via negotiation on or about Sept. 9, pending market conditions. Proceeds will refund all or a portion of the town's outstanding GO bonds, refunding series 2005, series 2007A, and series 2007B for an estimated net present value savings of $1.9 million or 6.4% of refunded principal.
In addition, Fitch affirms its 'AAA' rating on the approximately $96 million of outstanding GO bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are general obligations of the town backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: General fund operating results have been stable over an extended period, and reserve levels have been maintained at a satisfactory level. Keys to the town's financial performance have been its ability and willingness to increase property taxes, the dominant general fund revenue source, and careful expenditure management.
FAVORABLE LIABILITY PROFILE: Debt levels are low, outstanding debt is repaid rapidly and future capital needs and issuance plans are manageable. Unfunded pension liabilities are not concerning, but other post-employment benefits (OPEB), which Fitch considers a more flexible long-term obligation, are more considerable. The cost of servicing debt, pension, and OPEB consumes an affordable share of the operating budget.
BUSINESS CENTER PROXIMATE TO HARTFORD: The town is recognized as a retail and business destination in the East Hartford area. Its proximity to Hartford, the state capital and regional economic center, afford residents broader employment opportunities. Resident income and employment metrics are good. The town is relatively mature which could serve to strain economic and tax base growth opportunities over time.
RATING SENSITIVITIES
FINANCIAL STABILITY: Although not anticipated, a period of adverse budgetary performance resulting in a decline in the town's reserves or liquidity could pressure the rating.
CREDIT PROFILE
Manchester comprises an area of 27.2 square miles in the Connecticut River Valley, approximately nine miles east of Hartford at the intersection of interstates 84 and 384. The town's population is fairly steady, estimated at 58,211 in 2013.
SATISFACTORY RESERVE LEVELS
The town's current general fund reserve position is satisfactory with an unrestricted fund balance for fiscal 2014 totaling $18.3 million or 10.7% of spending. The town has consistently complied with a formal reserve policy equal to 5%-7% of revenue. Reserves are not particularly robust, but Fitch gives credit to the steady maintenance of reserves over time as well as the fairly predictable and stable nature of the town's revenue stream. The town ended fiscal 2014 with no fund deficits in any of its governmental funds or internal service funds (excluding temporary deficits reported in the capital project fund).
BUDGETARY BALANCE A KEY RATING STRENGTH
The consistency of general fund operating results over time is a key factor in Fitch's assessment of the town's finances. From fiscal years 1997-2014 the town has incurred a general fund deficit in only four years. The use of reserves has been a modest percentage of spending and has been primarily due to increased pay-as-you-go capital investment. General fund results for fiscal 2014 (year ending June 30) yielded a very favorable operating surplus after transfers equal to $4.7 million (2.6% of spending).
Management anticipates reporting near break-even results for fiscal 2015, consistent with the adopted general fund budget. The adopted budget for fiscal 2016 appropriates $1.18 million of fund balance. The fund balance appropriation can largely be linked back to a $668 thousand increase in capital spending and efforts to mitigate a larger tax increase. Fitch believes management will continue to adhere to and likely exceed its fund balance policy and continue to take action through future budgets to minimize the use of reserves for recurring spending.
MODEST GROWTH IN TAX LEVY
General fund operations are largely funded by real property taxes. The fiscal 2016 tax levy totals $137 million or 76% of total general fund revenue. The town has enacted millage rate increases in the range of 2%-4% annually (excluding revaluation years) to support growth in spending and fiscal stability. The town's tax burden remains regionally competitive and the town is not subject to a cap or limit on the property tax rate or levy, suggesting strong revenue raising capacity going forward.
Additional similar tax rate increases will likely be necessary to preserve the town's financial position over the next several years. The town is near fully developed limiting opportunities for growth related to new construction. Housing prices have not demonstrated much recovery; home prices fell 1.7% on the year according to data from Zillow Group, and remain 22% below the pre-recession peak. The town's grand list (or tax base) has increased a meager 2.2% in aggregate from fiscal 2009-2016, including a 0.8% gain in fiscal 2016.
VERY LOW DEBT
Fitch-estimated overall debt is very low at 1.1% of market value or $1,365 per capita. Future borrowing plans center on an $84 million referendum approved by voters in November to fund a school renovation and modernization project. The borrowing would be sizable relative to the town's outstanding direct debt ($96.3 million including bond anticipation notes); however, the project will be eligible for state school construction grants reducing the local contribution, and outstanding long-term debt is repaid rapidly (70% within 10 years) tempering the impact of any additional indebtedness.
AFFORDABLE RETIREE LIABILITIES
Liabilities related to the town's single-employer defined benefit pension plan are manageable. The plan, which covers substantially all town employees except for certified teachers and firefighters, reported a funded ratio of 79% as of July 1, 2014. The Fitch-adjusted ratio, substituting a 7% rate of return for the plan's 7.5% assumption, results in a funded ratio of 74.9%. The Fitch-adjusted unfunded actuarial accrued liability (UAAL) is approximately $52 million (compared to the reported UAAL of $41.2 million) or 0.9% of market value. The town fully funds the actuarial required contribution (ARC) for the pension plan, and the plan was closed to all new employees with the exception of police in 2004. Town employees hired after 2004 participate in a defined contribution plan.
OPEB liabilities are somewhat high at $169.1 million or 3% of market value as of July 1, 2014. The town has enacted a series of modifications to benefit coverage but continues to fund 50% to 100% of the cost of medical coverage for certain classes of employees, contributing to the high liability. The town established a trust for OPEB but funds the liability on a pay-as-you-go basis. The cost of funding the town's OPEB, pension, and debt service remains fairly low at 12.2% of governmental fund spending in fiscal 2014.
GOOD COMMERCIAL BASE AND CLOSE PROXIMITY TO HARTFORD
Manchester is a suburb of Hartford favorably positioned along I-84 with a fairly sizable and diverse commercial core. The town has a large retail presence anchored by The Shoppes at Buckland Hills, a 1.1 million sq. ft. shopping and dining destination. The town's commercial core includes manufacturers Vision Technical Molding and ABA Tools, and printing companies Allied Printing Services and R.R. Donnelly. Manchester Memorial Hospital is the second largest employer behind the town with 1,500 employees.
Resident employment growth accelerated in 2014 and remains strong through June 2015 after a slow recovery from the recession. Town employment trends have been fairly consistent with the state and Hartford MSA. The town's preliminary June unemployment rate of 5.2% is down from 6.6% in June 2014. The town's population exhibits educational attainment on par with the state and above the national standard. Per capita and median household income metrics lag the wealthy state but are 116% to 125% of the national norm.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's cited criteria, this action was additionally informed by information from CreditScope, University Financial Associates, S&P/Case-Shiller Home Price Index, Zillow.com, IHS Global Insight, National Association of Realtors, Underwriter, and Bond Counsel.
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990237
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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