Fitch Ratings has assigned the following rating to Hamden, Connecticut's (the town) general obligation (GO) bonds:
--$24.7 million GO bonds, issue of 2012 rated 'A-'.
The bonds are scheduled for a negotiated sale on or about Aug. 7, 2012. The purpose of the current debt issue is to refinance bond anticipation notes (BANs) issued for the construction of a new police station, renovation of the Memorial Town Hall, and various town and school capital improvements.
In addition, Fitch affirms the following ratings:
--Approximately $82 million outstanding GO bonds at 'A-'.
The Rating Outlook remains Negative.
The bonds are general obligations of the town backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
LIMITED FINANCIAL FLEXIBILITY: The Negative Outlook reflects Fitch's concern over the town's financial pressures, which include a nominal fund balance and continued growth in annual pension and other post-employment benefit (OPEB) costs.
MOUNTING PENSION LIABILITY: The town's pension plan remains exceptionally weak, and despite increasing the annual contribution in recent years, funding remains well below the annual required contribution (ARC), prompting continued growth in the unfunded liability.
TAX INCREASES HELPING OPERATIONS: Management forecasts positive, albeit modest operating results in fiscal 2012 and has budgeted a significant tax increase for fiscal 2013, primarily to provide increased funding of the pension ARC.
STRONG SOCIOECONOMIC INDICATORS: The town has a stable economy benefiting from the growing education and healthcare sectors. Wealth levels exceed national averages and unemployment is slightly below state and national averages.
MODERATE DEBT PROFILE: Debt levels are moderate and amortization is rapid, although the potential issuance of pension obligation bonds (POBs) would increase the town's debt profile markedly.
WHAT COULD TRIGGER A RATING ACTION
GROWING PENSION LIABILITIES: A lack of demonstrated progress towards addressing the significant unfunded pension liability, which continues to accumulate, will likely result in additional rating action.
LIMITED FINANCIAL FLEXIBILITY; RESERVES REMAIN DEPRESSED
After a recent history of consistently sound reserve levels, the town's financial position deteriorated significantly in fiscal 2010. A sizeable $8.1 million operating deficit reduced the unreserved fund balance to $831,000 (restated) or 0.4% of expenditures at the close of fiscal 2010, down from 4.7% the prior year. Property tax revenues, which have historically accounted for approximately 70% of general fund revenue, experienced slow growth due to the downturn in the residential housing market while other key funding sources, including intergovernmental revenues, building permits, and other charges for services declined as well due to the recession and overoptimistic budget expectations.
Although the property tax rate was increased by 6% after being relatively flat for three fiscal years, the town experienced a slight operating deficit (after transfers) of $256,000 in fiscal 2011 and the contribution made to pensions dropped by $6 million compared to fiscal 2010. Consequently, the fiscal 2011 general fund unrestricted fund balance (the sum of assigned, unassigned, and committed under GASB 54) remained weak at $558,000 or 0.3% of spending.
In an effort to eliminate a deficit in the medical self-insurance fund of $8.9 million, management approved the town's fiscal 2012 budget with an 11.6% property tax increase and several expenditure reductions. Expenditure reductions included consolidations within the parks and public works departments, and reductions in its workforce by 33 employees through fiscal 2012 (equal to a cumulative 36.5% reduction in workforce since fiscal 2008) generating approximately $1.2 million in savings. An additional reduction of 10 employees is expected through fiscal 2013.
Additional cost-saving measures have been instituted including privatization of the town's ice rink as the rink was consistently running deficits. Town fees have been raised to cover operational expenses where appropriate and the town budget included the additional 53rd-week pay period.
Management states that fiscal 2012 results to date are positive, despite a $1 million increase in unanticipated special education costs. Management has raised its previous surplus projection from $500,000 to $933,000, which would bring unrestricted general fund balance to a still weak 0.8% of budgeted fiscal 2012 spending.
EXPECTATIONS FOR FISCAL 2013
The fiscal 2013 budget has been adopted with a 6% increase to the town's property tax rate in order to provide additional revenue of $9.3 million that will be used to fund a greater portion of the pension ARC, support increased debt service costs and increase contributions towards medical insurance costs by $2 million. Management anticipates adding approximately $2.2 million to its general fund balance in fiscal 2013 through a combination of unbudgeted special education state assistance of $1.9 million and a $300,000 reimbursement from FEMA. The town hopes to end fiscal 2013 with approximately $3.7 million in general fund balance, equal to an improved, but still low 1.9% of budgeted fiscal 2013 spending.
PENSION CONTRIBUTIONS AND OPEB COSTS A CONCERN
Hamden has a sizable unfunded pension liability in its town plan which is closed to new hires. The funded ratio of the town's pension plan is 25% as of July 1, 2010. Using Fitch's more conservative 7% discount rate assumption, the plan is 23% funded. The funding level will likely decline further as the town has significantly underfunded its ARC, paying $6.6 million and $3 million towards a $19.1 million ARC, in fiscal 2011 and 2012, respectively.
In fiscal 2013, the town budgeted to increase its pension contribution by $6 million to a total of $9 million, which is still substantially less than the estimated $19.1 million ARC. Management stated its intent to continue increasing the pension contribution each year, although a definitive plan was not put forth. Management has hired a pension consulting firm to help address pension costs and will be reviewing its options over the next several months. The latest valuation includes an unfunded pension liability of $242 million as of July 1, 2010.
Positively, the town moved all newly hired employees to a state-run pension plan after July 2007, and has been fully funding that much smaller ARC, which in fiscal 2011 was equal to $500,000 or a low 0.3% of general fund spending. Management is reportedly considering issuing pension obligation bonds (POBs) to help resolve the unfunded pension liability. A sale of POBs could occur in the next six to 12 months.
The town recently passed a charter revision that allows for annual POB debt service up to 4% of the budget. Based on the town's fiscal 2013 budget, annual POB debt service could not exceed $7.6 million.
The town also has a large unfunded OPEB liability of $345 million as of the latest valuation completed on July 1, 2009. Hamden funds its OPEB on a pay-as-you-go basis, contributing $12.3 million in fiscal 2011, equal to a very high 6.7% of spending. The full ARC of $31 million in fiscal 2011 equates to 17.4% of spending. Total fixed costs if fully paid for debt, pension, and OPEB contributions, would have accounted for a notably high 30% of fiscal 2011 spending.
Overall debt levels are moderate at $2,119 per capita, or 2.2% of market value, and amortization is rapid with 75% of principal retiring within 10 years. Fiscal 2013 budgeted debt service equals $16.7 million, which is equal to a manageable 8.7% of the town's overall fiscal 2013 budget.
The town's fiscal 2013-2018 capital improvement program (CIP) totals $38.9 million. Tax supported projects consist of infrastructure improvements including town building improvements, road repairs, technology upgrades, and several other small projects. No additional borrowing for capital projects is anticipated in the current CIP.
STABLE ECONOMY AND HIGH WEALTH LEVELS
Hamden is a mid-sized town adjacent to New Haven with sizable and growing education and health services industries. Several universities, most notably Quinnipiac, are located in Hamden, and Yale University in adjacent New Haven employs 4,500 residents. A new campus at Quinnipiac with a cost of $380 million, a $100 million transit bus facility, and a $75 million expansion at the Whitney Center (an assisted living center) are all completed and should benefit the local economy in future fiscal years.
Income levels are slightly below the state average, but 127% of the national average. Tax collection rates remain strong, despite the broader recession, and area housing data indicate an average level of foreclosure activity. Unemployment for the town was 7.1% as of April 2012, down from 8.2% a year prior, but below the state level (7.7%) and the national level (8.1%).
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. 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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