Fitch Rates Meriden, CT GO Bonds 'AA-'; Outlook Stable
Fitch Ratings has assigned its 'AA-' rating to Meriden, CT's (the city) general obligation (GO) bonds as follows:
--$25.5 million GO bonds, issue of 2013.
The bonds are scheduled to sell via competition on or about Jan. 31, 2013.
In addition, Fitch affirms the following ratings:
--$37.6 million outstanding GO bonds at 'AA-'.
The Rating Outlook is Stable.
The bonds are a general obligation of the city backed by its full faith, credit, and unlimited taxing authority.
KEY RATING DRIVERS
SOUND FINANCIAL PERFORMANCE: The city's prudent and conservative budgeting practices have resulted in sound operating results somewhat offsetting pressure from potential reductions in state aid and increased costs for education.
MIXED SOCIOECONOMIC INDICATORS: Wealth levels are above average, and unemployment is high relative to the state and nation.
LOW DEBT BURDEN: Debt levels are low with above-average amortization of principal.
MANAGEABLE RETIREE COSTS: The city has been making 100% of required contributions to its pension plans and prudently increased annual contributions for its other post-employment benefits (OPEB) obligation. These liabilities are currently at manageable levels.
Meriden is located in northeast New Haven County, midway between New Haven and Hartford with a 2011 population of 60,770. The city benefits from a somewhat diverse tax base and stable population.
MIXED SOCIOECONOMIC INDICATIORS
The city is home to Midstate Medical Center, a full-service hospital, the Meriden campus of Middlesex Community College, a major mall, and a number of manufacturing firms with diversified product lines. The top 10 taxpayers represent a moderate 8% of net taxable grand list. The city continues to focus on attracting new businesses and reclaiming and rehabilitating existing land and properties for future development.
The city's tax base was revalued on Oct. 1, 2011, as part of the statutorily required five-year revaluation (effective for the fiscal 2013 budget). The city's fiscal 2013 market value is currently $4.6 billion and has decreased 10.7% from last fiscal year. The city prudently increased property tax rates by 4 mills to maintain revenue neutrality. Wealth levels exceed national levels but are below the strong state of Connecticut levels. The city's October 2012 unemployment rate is 10.3%, slightly elevated from 10% a year prior, and higher than both the state (8.6%) and the nation's (7.5%) rates.
SOUND FINANCIAL MANAGEMENT
The city's finances are well managed. The city's fiscal 2011 unrestricted general fund balance (the sum of committed, assigned, and unassigned as per GASB 54) totaled $17.3 million or a sound 9.6% of spending. Results were marginally above the city's recently adopted formal policy calling for the average of one month's budgeted spending from the prior fiscal year (8.3% for fiscal 2011).
Fiscal 2012 posted a small deficit (0.5% of spending) after three-years of operating surpluses. This was due primarily to the city's increased OPEB funding to 50.7% of the annually required contribution from 29.6% in fiscal 2011. Fitch views the increased contribution as a credit positive in conjunction with the city's stated commitment to adhere to its fund balance policy.
Annual property tax increases have supported revenue growth, offsetting minor shortfalls in non-tax revenues and state aid. Expenditure performance has matched revenues, declining 2.2% on average between fiscal 2008 and fiscal 2012, reflecting the city's flexibility in adjusting spending. The 7.3% increase in fiscal 2012 spending was one-time in nature, driven by employee and education costs related to special revenue funds (American Recovery and Reinvestment Act). The city's fiscal 2012 unrestricted general fund balance totaled $16.6 million, equal to a sound 8.6% of spending, and in compliance with the city's fund balance policy.
The city's fiscal 2013 general fund budget of $183.6 million is up by a slight 1.4% from fiscal 2012. The budget includes a 4% increase in property tax revenues (equal to approximately $4 million) to support increases in public safety, highway improvements, and insurance costs. The budget includes a $1.2 million appropriation of fund balance to once again support increased contributions to its OPEB trust. Beginning in fiscal 2014 management has said that OPEB contributions will become structured into the budget which Fitch views as a credit positive.
DEBT LEVELS UP BUT EXPECTED TO REMAIN LOW
Debt levels remain low after the current issuance with debt per capita at $1,426 and debt to market value at 1.9%. GO debt amortizes at an above average rate with 60.8% of principal amortized in 10 years. Including the new issue, debt service as a percentage of general fund expenditures will approximate 8.4% of the fiscal year 2013 budget compared to 6.2% in fiscal 2012, and is above the enacted goal of 5% of spending. While Fitch views non-compliance with policies as a credit negative, the debt service burden remains affordable and the city continues to adhere overall to its conservative debt policies. Fitch does not expect debt levels to rise following the current issue as the remaining $322 million five-year capital plan is largely funded through grants and user fees.
MANAGEABLE RETIREE COSTS
The city administers three pension plans for its general, fire, and police employees. In accordance with its policy, it has made 100% of its annual required contributions (ARC) for the last five years for each of these plans. Contributions in fiscal 2012 for all three plans totaled $8.5 million (4.4% of general fund spending).
As of July 1, 2010, the general employees' plan was 105% funded; the police plan was 62.9% funded; and, the fire plan was 68.4% funded. Using Fitch's more conservative 7% discount rate assumption, the plans would be funded 94.6%, 56.5% and 61.6%, respectively. The combined unfunded liability for the police and fire plans totaled $60.1 million. The city has established a defined contribution plan for non-safety employees hired as of July 1, 2011, which is expected to reduce future pension obligations.
The city's fiscal 2012 OPEB contribution was $5.6 million (51% of its ARC), equal to manageable 3% of spending. The unfunded OPEB liability was $99.2 million as of July 1, 2010. Management is projecting a decline in the future OPEB ARCs due to agreed increases in employees' contributions toward future benefits. The city will not be providing OPEB benefits for new employees hired after July 2009.
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, and the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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