Fitch Ratings assigns an 'AA-' rating to the following City of Worcester, MA (the city) general obligation (GO) bonds:
--$6,844,154 million GO district improvement financing bonds, series 2012.
The bonds are scheduled to sell competitively on May 17th. Proceeds will be used to retire bond anticipation notes issued to support public infrastructure improvements within the CitySquare development project.
In addition, Fitch affirms its 'AA-' rating on the city's outstanding $573 million GO bonds.
The Rating Outlook is Stable.
The bonds are a general obligation of the city and backed by its full faith and credit.
KEY RATING DRIVERS
STRONG MANAGEMENT PRACTICES: Management has a demonstrated record of conservative budgeting and strong fiscal management contributing to improved financial performance.
ADEQUATE RESERVE LEVELS: Solid financial results the past two years, combined with prudent management decisions, have led to growth in the city's reserves.
POSITIVE ECONOMIC DEVELOPMENT: Major economic development projects underway within the city are contributing to economic growth and adding to taxable values.
BELOW-AVERAGE SOCIOECONOMIC INDICATORS: Wealth levels are below state and national averages, and unemployment remains high.
DEBT RATIOS ARE MODERATE: Future debt needs are manageable and principal amortization is above-average.
HIGH PENSION AND OPEB LIABILITIES: Unfunded employee benefit obligations are notable, but funding levels have improved and the city consistently funds the actuarially required pension contribution.
ECONOMY IS EXPERIENCING GROWTH
Worcester is located roughly 39 miles west of Boston and serves as the regional economic hub of central Massachusetts. The city currently has over $2 billion in projects in various stages of development, the largest of which is the mixed-use CitySquare project.
Also underway is a $100 million commuter rail expansion project anticipated to provide a new rail terminal and 20-25 new commuter trains from Boston by late 2012. This infrastructure expansion will almost certainly increase the attractiveness of Worcester as a commutable alternative to other suburban communities. The new development also bodes well for the city as it not only provides job growth but should benefit the taxable assessed values (TAV). TAV declined 10% in fiscal 2010 from fiscal 2009 levels to $10.9 billion as a result of the Jan. 1, 2009 revaluation, and declined another 0.5% for fiscal 2011.
A new revaluation has been conducted based upon Jan. 1, 2011 valuations, and management has indicated that results show positive growth of 4% primarily on the commercial side. Final certification from the Massachusetts Department of Revenue (DOR) was delayed due to DOR's request for substantiation of the increase from the city, but is expected later this month. Once received, the city will set the fiscal 2012 tax rate and send final quarterly tax bills. In the unlikely event certification is not received this month and tax bills are delayed, the city plans to ensure adequate cash flow through the end of the June 30th fiscal year and could resort to cash flow notes and interfund borrowing if necessary.
BELOW-AVERAGE SOCIOECONOMIC INDICATORS
The city's wealth levels have historically been below state and national averages. The unemployment rate remains above state levels despite a slight uptick in employment. In February 2012, the city's unemployment rate was 8.7% compared to 8.8% a year prior with a 0.6% increase in employment for the same period. The presence of 10 higher education and several healthcare institutions provides stability to the local economy. The city has experienced population growth over the past decade, increasing 4.9% to 181,045 presently.
STRENGTHENED FINANCIAL PROFILE
The city's financial position has improved. After a general fund operating surplus of $5.9 million after transfers in fiscal 2010, the city had a budgetary operating surplus of $3.7 million for fiscal 2011. This was the result of higher than anticipated property tax and motor vehicle excise payments and increased meals tax revenues. The surplus plus transfers in, as a result of the reclassification of special revenue funds in accordance with newly implemented GASB 54 reporting, increased the general fund balance by $6.8 million. The city's unrestricted general fund balance (the sum of committed and unassigned, as per GASB 54) totaled $17.8 million at fiscal end 2011 equivalent to a modest 3.2% of operating expenditures.
This improvement in the city's finances has occurred despite pressure the last several years from state aid cuts, increases in employee benefits, and a weakness in economically sensitive revenues. To offset these financial pressures, management instituted operational reforms, a hiring freeze, and continues to make conservative budgeting decisions. These actions, along with constant budget monitoring contributed to the city's positive results in fiscal 2010 and 2011. Additionally, city management partnered with union officials and its workforce to help stabilize its operations. It achieved a third year of zero wage increases for fiscal 2012 and successfully introduced a new healthcare program that is projected to save the city over $5 million in fiscal years 2012 and 2013.
The city's fiscal 2012 budget includes conservative revenue estimates, continued deposits to its bond rating stabilization fund and a 4.1% property tax levy increase (1.5% of which comes from new growth in assessed value). The city was able to avoid additional layoffs this fiscal year because of savings generated from the introduction of the new health plans and has made no reductions in essential services. According to management, revenues are trending ahead of budget due to its conservative estimates. Offsetting these positive variances slightly are snow removal costs that exceeded budget due to October snowstorm cleanup costs and some higher than anticipated overtime costs.
The city is subject to property tax levy limits imposed by the state's Proposition 2 1/2. Proposition 2 1/2 is a two-prong test, whereby the tax levy cannot exceed 2.5% of the full and fair cash value (primary limit) and cannot exceed the prior years maximum levy by more than 2.5% excluding new construction (secondary limit). For fiscal 2012, the city levied $44 million below the primary levy limit and $10.1 million below the secondary limit.
The city has historically kept a $10 million cushion below its secondary limit. Barring any unforeseen major reductions in assessed values, the city should retain the financial flexibility that this cushion affords going forward based on management's history of conservative budgeting practices. The city has prudently developed a five year forecast identifying salary and education spending challenges and continues to build reserves to preserve financial flexibility, which Fitch views positively.
The city's preliminary 2013 budget showed an $8 million structural imbalance but management has reduced the gap to $1 million through health care savings, reduction in capital improvements and an increase in state aid based on the proposed state budget. Local funding has been kept level. The 2013 budget includes wage increases for the city's union workers as contracts were settled through June 30, 2013. Adoption of the fiscal 2013 budget is expected in early June.
MODERATE DEBT LEVELS OFFSET BY HIGH FUTURE RETIREE COSTS
Overall debt ratios, excluding self-supporting debt, are moderate with debt per capita at $3,443 and 5.2% of equalized value. Debt amortization is rapid with 69% paid off in 10 years.
Worcester's combined long-term liabilities related to retiree benefits are large. The city's pension funded ratio was 71% as of Jan. 1, 2011; however, using Fitch's more conservative 7% discount rate assumption, the pension plan would be a low 62% funded. The city's unfunded pension liability at Jan. 1, 2011 totaled $300 million or a moderate 2.5% of equalized value.
The city consistently funds 100% of the actuarially required contribution (ARC) for pensions. The ARC totaled $29.8 million, representing 5.3% of general fund spending in fiscal 2011, and increased by 10% in fiscal 2012 with another 8% projected increase for fiscal 2013.
The city's unfunded other post employment benefits (OPEB) liability totaled $765 million as of June 30, 2010 or 6.4% of equalized value, but due to the recent healthcare reforms the city's actuary has estimated that its OPEB liability will be 13% less at approximately $665 million (5.5% of equalized value). The city funds annual OPEB costs on a pay-go basis.
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 the National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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