OREANDA-NEWS. Fitch rates the Town of Cheshire, CT's (the town) general obligation (GO) bonds as follows:

--\$15,000,000 GO bonds, 2015 'AAA'.

The bonds are scheduled to sell competitively on Feb. 12. Proceeds will be used to fund various sewer, general purpose and school construction projects.

In addition, Fitch affirms the following ratings:

--Approximately \$48 million outstanding GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the town's full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: Cheshire's strong financial management has prudently raised annual revenues to meet its expenditures, contributing to consistently solid reserve levels. Conservative budget practices and operating within management's policies supports the town's financial flexibility.

ABOVE-AVERAGE SOCIOECONOMIC INDICATORS: Sound economic indicators include high income levels, low unemployment rates, and very strong tax collection rates. Economic development activity should contribute to increased tax-base values over time.

INCREASED PENSION LIABILITIES: Overall funded levels have declined due to a combination of weak investment results, management's prudent decision to reduce the interest rate assumption, and recent underfunding of the resultant growth in the annual required contribution (ARC). Fitch believes the town is poised to successfully absorb its scheduled growth in carrying costs given the low base (10% of fiscal 2014 spending) and rapidly amortized debt.

LOW-TO-MODERATE DEBT RATIOS: Debt levels are currently low-to-moderate but future debt issuance is anticipated.

RATING SENSITIVITIES

MAINTENANCE OF FINANCIAL FLEXIBILITY: The rating is sensitive to a shift in the town's overall level of financial flexibility. Maintenance of its solid cushion is crucial to rating stability as the town absorbs increases in its scheduled pension payments to meet the ARC and debt service for new issues.

CREDIT PROFILE

Cheshire is a residential suburban community with a population of 29,261 and is located 14 miles outside of New Haven and 25 miles south of Hartford.

SOUND ECONOMIC UNDERPINNINGS

Cheshire has evolved over several decades from a predominately rural farming community to a more residential community with an established industrial and commercial component. Top taxpayers include a mix of industrial, retail and manufacturing companies. The town's proximity to interstates 84, 691 and 91 linking to larger nearby employment centers contributes to economic activity. Cheshire is also home to two large state prison facilities which currently employ 706 workers.

The town underwent a statutorily required five-year property revaluation effective Oct. 1, 2013, which is effective for the fiscal 2015 budget. The revaluation resulted in a 6.3% decline in taxable assessed values (TAV), which is moderate compared to other Connecticut municipalities that underwent the same recent revaluation. Currently planned economic development activities, including the proposed Cheshire Outlets, bodes well for future tax-base growth.

Wealth levels remain high. Median household income for 2013 equaled 161% and 211% of state and national levels, respectively. The town's unemployment rate was 4.9% as of November 2014 compared to 5.7% a year prior and continues to rank lower than the state's rate of 6.2% for the same period. Cheshire experienced job growth of 4.2% and employment growth of 3.3% for the one-year period.

STRONG FINANCIAL PERFORMANCE

The town's strong and stable financial management is evidenced by 10 straight years of an approximate 2% tax levy increase to support revenue growth, moderate annual expenditure increases and ample reserves. Employee-related expenses and school department costs continue to dominate the town's budget. Property taxes make up the majority of general fund revenues (74% in fiscal 2014).

Management has made it a practice to fund its non-recurring and capital projects fund annually through general fund transfers. Such transfers have amounted to between \$530,000 and \$1,000,000 over the past five years. Operating results after these transfers have been mixed but unrestricted fund balance levels have remained between 11%-12% of spending.

The general fund experienced a modest operating deficit for fiscal 2014 of \$223,296 (0.2% of spending), after transfers out of \$950,000 for capital projects. The operating results reflect consistently strong tax collections, and lower departmental costs compared to budget. The town prudently continues to dedicate funds to pay-as-you-go capital but, with pension ARC underfunding, operating results are somewhat overstated. The budget included \$700,000 of fund balance appropriation and \$294,000 for bulky waste collection. Results negated the need to use all of this appropriation, as has historically been the case. The unrestricted general fund balance remains solid at 11.2% of spending. The town's unassigned general fund balance increased slightly to \$9.4 million from \$9.2 million and, at 9.4% of budgetary expenses, remained above the town's budgetary fund balance policy of 8%-9%.

Further financial flexibility is derived from \$5.5 million currently held in the debt service reserve fund. This amount is earmarked to help smooth out a short-term spike in future debt service costs beginning in 2018 connected to planned borrowing for water treatment plant upgrades.

FISCAL 2015 BUDGET INCLUDES MODEST TAX LEVY INCREASE

The town's fiscal 2015 general fund budget of \$102 million is up modestly from \$99 million last year and includes a 2.9% tax levy increase. The budget remains conservative and includes a use of \$700,000 of fund balance and \$100,000 for a tax-relief appropriation due to the recent property revaluation. Increases in education, medical, salary, and pension costs are drivers for the increase in the budget.

The town has historically included in its budget transfers for maintenance and small capital projects to reduce borrowing needs, and these total \$1.1 million for 2015. Management has indicated that expenses for the fiscal year to date are in line with expectations and revenues are up slightly due to strong tax collections exceeding the budgeted 99% collection rate. Management is again projecting a modest budgetary surplus and minimal change in its fund balance levels.

LOW DEBT RATIOS EXPECTED TO INCREASE

Debt ratios are moderate on a per capita basis at \$3,001 but low at 2.1% of market value (net of state school construction grants).

The town's capital needs are varied with the bulk of the needs pertaining to sewer infrastructure improvements and education. Debt levels are expected to rise moderately with potential debt issuances over the next four years totaling \$35 million for town and school improvements and various other capital needs.

Debt ratios above include a \$15.4 million draw on \$25.9 million of available state Clean Water Fund program borrowings for the town's \$33 million upgrade to its water treatment plant. The borrowing was approved by residents in a November 2012 referendum. The current rapid debt amortization rate along with available debt reserve funds help mitigate the expected increase in the town's debt burden.

GROWING PENSION LIABILITIES; MANAGEABLE OPEB

The town administers three single-employer pension plans which have been closed to certain new hires between 2006 and 2014, except volunteer firefighters. The police pension has been closed effective Jan. 1, 2014. Increases in employee pension contributions were achieved through negotiations which should also help alleviate future pension costs. The town's aggregate funded ratio for its town, police and volunteer firefighter pension plans was a somewhat weak 68% as of July 1, 2013 or an estimated 65% funded using Fitch's more conservative 7% rate of return. The combined unfunded pension liability for the three plans was \$28 million, or a low 0.7% of market value.

Management has gradually reduced the investment rate of return from 8.25% to 7.5% for fiscal 2014. Management has been increasing its annual contribution by approximately \$500,000 since fiscal 2012 but remains below 100% funding. Fiscal 2013 contributions were \$2 million or 76% of the ARC; fiscal 2014 contributions were \$2.5 million (72% of ARC); and fiscal 2015 budgeted contributions are \$2.9 million or 83% of the ARC.

The town's ARC for other post-employment benefits (OPEB) of combined school, police and town employees was \$2.328 million in fiscal 2014 and the town made pay-as-you-go contributions of \$1.1 million (49%). The OPEB unfunded liability as of July 1, 2013 was a manageable \$27 million, \$17 million of which represents an implicit rate subsidy incurred by the town for retired teachers' participation in its health plan.

Fitch views negatively the town's pension ARC underfunding and recognizes that absent other measures, operating results would have been weaker over the last few years. However, important mitigants include rapidly amortized debt (77% in 10 years) and low carrying costs (10.3% of fiscal 2014 spending) for debt service, pension ARC and OPEB. Fitch's key expectation supporting the current rating is that management will adhere to its measured approach to reach full ARC funding by fiscal 2020 while absorbing increasing debt service costs and maintaining its solid cushion.