Market Overview

Fitch Affirms Lewes, DE GOs at 'AA'; Outlook Stable

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the 'AA' rating on the following general obligation (GO) bonds of Lewes, Delaware (the city):

--$15,505,000 GO bonds, series 2005.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city backed by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

RESERVES REMAIN STRONG: Financial operations remain structurally balanced and the city maintains good budgetary flexibility in the form of strong general fund reserves. The reserves, although a small dollar amount, somewhat mitigate risk related to the cyclical nature of the city's economic base and key revenue streams.

SEASONAL ECONOMIC BASE: Local economic activity centers on tourism and leisure spending, and healthcare. Per capita income levels are high reflecting the presence of affluent retirees. The regional employment picture continues to improve and unemployment remains considerably lower than the national average.

MANAGABLE DEBT: Fitch considers key debt ratios to be generally moderate. While the city does not prepare a formal multi-year capital planning document, reported needs are limited to vehicle acquisition and there are no plans to issue additional long-term bonds.

CREDIT PROFILE

OPERATIONS REMAIN BALANCED AND RESERVES HEALTHY

Fiscal 2012 (ending March 31) concluded with a $2.56 million general fund operating surplus (after transfers) which reflects the transfer in of $2.25 million of unspent bond proceeds allocated to the Lewes Board of Public Works (BPW). These funds have been committed for capital expenditure in fiscal 2013. Excluding these funds the general fund unrestricted fund balance (the sum of the unassigned, assigned, and committed fund balance under GASB 54) was $1 million or a healthy 20% of spending. An additional $1.4 million of unassigned fund balance in the capital projects fund can be used for general governmental purpose, if necessary. The city does not have a formal fund balance policy.

The fiscal 2013 budget projects flat revenue growth from the year prior. Operating revenues are diverse including property taxes (48%), BPW franchise fees (14%), transfer taxes (9%) and rental taxes (7%). The city raised its property tax rate more than 16% effective fiscal 2011 and certain other fees in order to maintain services and preserve a sound financial position. The fiscal 2013 budget remains structurally balanced, and does not project the use of existing reserves other than the $2.25 million in unspent bond proceeds transferred into the general fund in fiscal 2012.

TOURISM DRIVEN ECONOMY; STRONG INCOME METRICS AND LOW UNEMPLOYMENT

Lewes is located in southeastern Delaware in Sussex County, along the Delaware Bay and bordered to the east by the popular Cape Henlopen State Park. The city has a small year-round population of 2,789 that expands by several multiples during the popular tourism months.

The city's tax base is predominantly residential, and exhibits a very high market value per capita that reflects a large number of vacation properties and the high wealth characteristics of the community. Per capita money income for the city is 35%-45% above the state and nation.

Taxable values are infrequently assessed in Delaware. Lewes's tax base was last assessed in 2000. There are no plans for reassessment. However, if assessed value (AV) were to decline due to reassessment the city could adjust its tax rate to offset any revenue loss, as its tax rate and levy are not subject to statutory restriction. Significant tax base growth is not expected in the future, as the city is near full development.

Employment data is not available for the city given its small size. In Sussex County the July 2012 unemployment rate of 6% compares favorably to the average of the state (7.1%) and nation (8.6%). In Sussex County total employment has risen by 2.9% over the prior year, lowering the unemployment rate from 6.5% in July 2011.

The largest local employers are in the health care and education sectors including Beebe Medical Center (rated 'BBB-', Outlook Negative by Fitch) with 1,600 employees, Cape Henlopen School District (775), Harbor Health (190), SPI Pharma (70) and the University Of Delaware College Of Marine Studies (65).

MANAGEABLE DEBT; NO FUTURE BORROWING PLANS OR NEEDS

The city has approximately $23.7 million in fixed rate GO bonds (net of $3.4 million principal amount subject to economic defeasance) and state revolving fund notes, of which $14.7 million has been issued to fund BPW projects and is paid from utility operating revenue.

The city's net direct debt is equal to a low 0.8% of market value but a more moderate $3,221 per capita. Debt service charges attributed to the general fund are an estimated $1 million or a somewhat high 21.7% of spending. As a small and near built-out community capital needs are limited and the city does not expect to issue additional long-term debt.

Routine capital needs are addressed through a dedication of a portion of the city's transfer tax revenue. A balance of $3 million is held within the capital projects fund, of which $1.5 million is legally restricted for capital use or debt repayment.

MODEST PENSION COSTS; NO OPEB LIABILITY

Contributions to a state pension plan for police officers and a city sponsored defined contribution plan for general employees are modest. The fiscal 2013 budget includes approximately $230,000 in pension costs, or 4.8% of general fund spending. The city does not provide retirement health benefits.

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 the 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 Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 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

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Fitch Ratings
Primary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Ginny Glenn, +1-212-908-9130
Analyst
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
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Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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