Fitch Ratings assigns an 'AA-' rating to the following city of Worcester, MA's (the city) general obligation (GO) bonds:
--$72,133,000 GO municipal purpose loan of 2012 bonds.
The bonds are scheduled to sell competitively on Oct. 23rd. Bond proceeds will be used to finance various city, school, and water and sewer system improvements.
In addition, Fitch affirms its 'AA-' rating on the city's outstanding $545 million GO bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are a general obligation of the city and are backed by its full faith and credit but the property tax levy is limited by state statute.
KEY RATING DRIVERS
STRONG MANAGEMENT PRACTICES: Worcester's recent history of sound operating results is a reflection of its strong financial management, prudent fiscal policies and conservative budgeting practices.
ADEQUATE RESERVE LEVELS: Solid financial results and prudent management decisions the past two years have led to growth in the city's general fund reserves to adequate levels. Financial projections for the fiscal year ending 2012 continue that trend. Financial flexibility is enhanced by its cushion under the primary and secondary property tax cap and additional reserves outside the general fund.
POSITIVE ECONOMIC DEVELOPMENT: Major economic development projects underway within the city are contributing to substantial economic growth and increasing taxable values.
BELOW-AVERAGE ECONOMY; STRONG INSTITUTIONS: Wealth levels are below state and national averages and unemployment remains high, but levels are somewhat skewed due to the large student population. However, Worcester benefits from the presence of highly acclaimed higher education and healthcare institutions providing stability in the economy.
MODERATE DEBT: Debt ratios are moderate and future debt needs are manageable; principal amortization is above average.
HIGH RETIREE COSTS: Unfunded employee benefit obligations are notable, but aggregate funding levels have improved and the city consistently funds the actuarially required pension contribution.
CREDIT PROFILE
IMPROVED FINANCIAL PROFILE
Fitch's 'AA-' rating and Stable Outlook reflect Worcester's recent trend of positive fiscal operations and historically strong fiscal policies that buttress its financial profile and position it favorably against any future economic uncertainties. Additionally, economic development efforts have been significant, increasing the investment in the city and its ability to attract new business ventures.
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 operating results in fiscals 2010 and 2011. Additionally, city management partnered with union officials and its workforce to help stabilize its operations for the long term. 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 fiscals 2012 and 2013, and more thereafter.
After a general fund operating surplus of $5.9 million after transfers in fiscal 2010, the city had an operating surplus of $3.7 million for fiscal 2011 as a result of higher than budgeted 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.
Unaudited financial results for fiscal 2012 are positive. A net general fund operating surplus after transfers of $8.1 million is projected for fiscal year-end 2012 due mostly to tax, fee, and intergovernmental revenues outpacing conservative projections and expenditures coming in less than anticipated. This will result in a projected increase in fund balance to $27 million, $25.5 million of which is projected to be unassigned, equal to an improved 4.4% of spending.
The fiscal 2013 budget of $542 million is up 3% over fiscal 2012. Education is the largest item, representing 43% of total spending and is up by $11 million to $234 million. The only other notable increases are for pensions and public safety costs. Health insurance costs were lower due to implementation of the new insurance plans and debt service is only marginally higher at $47.7 million, including the city's pension bonds. Property taxes are budgeted to increase by 3.4% or $7.8 million, and state aid is budgeted higher by 3%. Most other revenues are conservatively budgeted lower than actuals for fiscal 2012.
Beginning in fiscal 2014 management will prudently include in the budget, on an ongoing basis, $5 million to fund a trust for future other post-employment benefit (OPEB) costs. This is being accomplished through an amendment to the city's Five-Point Financial Plan under which free cash at year end will be allocated annually 20% for use in the operating budget, 30% to fund future OPEB liabilities and 50% to fund the bond rate stabilization account. Management's historical commitment to the allocation of it free cash to help cushion itself against fiscal uncertainty is a credit positive and viewed favorably by Fitch.
PROPOSITION 2 1/2 LIMITS TAX LEVY
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 year's maximum levy by more than 2.5% excluding new construction (secondary limit). For fiscal 2012, the city levied $42 million below the primary levy limit and $10.4 million below the secondary limit.
The city has historically kept a $10 million cushion below its secondary limit and its five-year financial projection continues this practice. 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.
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. Over half of the $2 billion in new projects are taxable, supporting ongoing taxable assessed value (TAV) growth. TAV improved 3.4% in fiscal 2012 to $11.3 billion after declines of 0.5% in fiscal 2011 and 10% in fiscal 2010 as a result of the Jan. 1, 2009 revaluation. TAV is projected to increase again in fiscal 2013 due to the new developments citywide.
Also underway is a $100 million Boston-based commuter rail expansion project anticipated to provide a new rail terminal and additional train service to Boston. This infrastructure expansion will almost certainly increase the attractiveness of Worcester as a commutable alternative to other suburban communities.
BELOW-AVERAGE SOCIOECONOMIC INDICATORS
The city's wealth levels have historically been below state and national averages, partially due to the large student presence. The unemployment rate of 8.7% (July 2012) remains above state levels (6.6% for the same period) compared to 9.6% a year prior. The city's rate is in line with the national rate of 8.6%. The city has experienced notable population growth since 2000, increasing 5.2% to 181,631 presently.
The presence of 10 higher education and several major healthcare institutions provides stability to the local economy. The full-time student population is estimated at over 27,000 and is supported in part by the College of Holy Cross, Clark University, Assumption College, UMass Medical School, and Worcester Polytechnic. UMass Memorial Health Care is the largest employer with 13,814 employees, followed by UMass Medical School (5,712) and Saint-Gobain Abrasives Inc. (2,000).
MODERATE DEBT LEVELS OFFSET BY LOW FUNDED FUTURE RETIREE COSTS
Overall debt ratios, excluding self-supporting debt, are moderate with debt per capita at $3,484 and 5.2% of 2012 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 declined to 68% as of Jan. 1, 2012 from 71% a year prior. Using Fitch's more conservative 7% discount rate assumption, the pension plan would be a low 61% funded. The city's unfunded pension liability at Jan. 1, 2012 totaled $339 million or a moderate 2.8% of equalized value.
The city consistently funds 100% of the ARC for pensions. The general fund portion of the total fiscal 2012 ARC was $26 million, representing a high 4.5% of general fund spending in fiscal 2012. The ARC is projected to increase by 8% in fiscal 2013.
The city's unfunded OPEB liability totaled $656 million as of June 30, 2012 or a moderately high 5.5% of equalized value. This is down from $765 million in 2010 due to the recent healthcare reforms implemented by the city. The city funds annual OPEB costs on a pay-go basis, but as mentioned above, will be establishing a trust and begin making deposits in fiscal 2014 to help offset its liability. Pay-go costs incurred by the general fund in fiscal 2012 totaled $22.5 million, or 3.9% of spending.
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 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:
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst
Kevin Dolan, +1-212-908-0538
Director
Fitch,
Inc.
One State Street Plaza
New York, NY 10004
or
Secondary
Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee
Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media
Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com