Fitch Rates Danbury, CT's GO Bonds 'AAA'; Outlook Stable
--$18,000,000 GO bonds, series 2015, 'AAA';
--$25,000,000 GO bond anticipation notes (BANs) of 2015 'F1+'.
The bonds and notes are scheduled to sell competitively on July 14. Proceeds of the bonds will be used to refinance a portion of outstanding BANs and for various general purpose and school projects. The BANs are being issued for general city and school projects.
In addition, Fitch affirms the following ratings of the city:
--Approximately $137 million outstanding GO bonds at 'AAA';
--$31.6 million outstanding BANs maturing July 23, 2015 at 'F1+'.
The Rating Outlook is Stable.
SECURITY
The bonds and BANs are general obligations of the city backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
STRONG FINANCIAL POSITION: The city's strong financial management implements conservative budget decisions and complies with its prudent operating policies contributing to consistently solid reserve levels. The city maintains a high degree of financial flexibility.
ABOVE-AVERAGE SOCIOECONOMIC INDICATORS: The city's economic profile is strong with a broad economic base and continued economic development. Economic indicators include high income levels and below-average unemployment rates. The city benefits from its proximity to New York City and nearby employment centers.
LOW DEBT LEVELS: Debt ratios are low and are expected to remain within manageable levels given the rapid amortization of existing debt and the city's long term debt plans.
MANAGEABLE FUTURE RETIREE COSTS: The city contributes 100% of its annual required contribution (ARC) toward its pensions and funded levels are solid. Other post-employment benefits (OPEB) are manageable and management prudently plans to continue to annually increase its contributions gradually above pay-go.
STRONG MARKET ACCESS: The 'F1+' short-term rating reflects the strong credit characteristics of the city and Fitch's expectation for strong market access.
RATING SENSITIVITIES
MAINTENANCE OF FINANCIAL FLEXIBILITY: The rating is sensitive to a shift in credit fundamentals including the city's overall level of financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
Danbury is the largest city in northern Fairfield County and has a 2013 population of 83,684 (up 11.8% since 2000). Danbury is located approximately 60 miles north of New York City and is proximate to other major employment centers in Connecticut.
SOUND FINANCIAL MANAGEMENT
The city maintains a healthy level of financial flexibility with consistently solid general fund reserve balances. Management retains independent revenue raising flexibility as there are no statutory tax limitations in Connecticut, further enhancing financial flexibility. Additional flexibility is derived from regular capital spending from the general fund.
The city ended fiscal 2014 with a moderate surplus of $389,720 after transfers in contrast to the $2.35 million appropriated fund balance. The positive results reflect continued careful cost management, higher charges for services than expected, and budgeted savings due to vacant positions and lower debt service costs. Transfers out for capital projects totaled $2.8 million (1.2% of spending). The unrestricted fund balance improved to $28.8 million (a sound 12% of spending) from $27.9 million the prior year.
FISCAL 2015 RESULTS SHOW MODEST DEFICIT
The fiscal 2015 budget increased by $8.4 million over fiscal 2014 and included a 2.99% property tax levy increase. Education and employee benefit costs were the primary cost drivers. Capital outlay totaled $5.5 million and includes $3.2 million in proceeds from the sale of land. Management conservatively projects a modest deficit of $380,000, an amount less than the originally budgeted $1.85 million of appropriated fund balance.
FISCAL 2016 BUDGET INCREASES REVENUES
The adopted fiscal 2016 budget of $237.7 million is up a modest $2 million over the prior year's budget. The tax levy increased by $6.1 million with $1.7 million attributed to new growth in taxable value. Property taxes represent the largest revenue source and make up a high 83% of total general fund revenues.
The largest expenditure change reflects a $2.6 million increase in the public safety budget tied primarily to operations of the city's new dispatch center. Management increased OPEB funding over and above pay-go by $922,000, part of its continued plan to gradually reach full funding of its OPEB ARC. A slightly smaller $1.8 million use of fund balance was approved, down $50,000 from the prior year, and part of management's strategy to lessen its reliance on use of fund balance in future budgets.
LOW DEBT BURDEN
Overall debt levels are moderate at $2,063 per capita but low as a percentage of market value at 1.7%. Amortization of direct debt is rapid with 73% of principal retiring within 10 years.
Voters have approved a number of capital improvement initiatives over the past few years, including $53.5 million in high school expansions and renovations approved this past June. Costs for this project are eligible for an estimated 63% reimbursement from the state. Future debt of $12 million-$15 million annually for the next four years is anticipated to meet these initiatives. Debt levels should remain moderate to low given the rapid amortization rate and management's debt policies that restrict debt service to no greater than 10% of general fund expenses and debt to assessed value to no greater than 3%.
FUTURE RETIREE COSTS WELL FUNDED
The city has historically funded its ARC for its six pension plans at the required levels. In 2012, management lowered its interest rate assumption for each of the plans to 7.25% from 8% and pensions remain well funded. On an aggregate basis, the city's six pension plans are estimated to be 82% funded using Fitch's 7% discount rate assumption. Fiscal 2016 costs increased to $10.6 million from $9.8 million for the prior fiscal year. The aggregate unfunded pension liability totals $57.7 million, based on the most recent valuations available, or a low 0.6% of market value.
OPEB costs are currently manageable. Management has established an OPEB reserve currently funded at $1.2 million and included a $450,000 appropriation in its fiscal 2015 budget as a contribution to this reserve. The unfunded OPEB liability as of July 1, 2012 totals $134 million and $20 million for city and board of education employees, respectively, or a manageable 1.5% of market value. Management prudently plans to increase its OPEB funding by an additional 5% each year until it reaches full funding of the ARC.
Carrying costs for debt service, pension and OPEB pay-go are currently low at 11% of fiscal 2014 total governmental spending but will likely increase slightly as pension, OPEB and debt service costs increase over the next few years.
STRONG SOCIOECONOMIC INDICATORS
Danbury, located within 60 miles of New York City and Hartford, benefits from continued economic development and its role as an important regional employment and retail center. The Western Connecticut Health Network affiliated Danbury Hospital is the city's largest employer with 2,283 employees. Other large employers include Boehringer-Ingelheim Pharmaceuticals (1,800 employees), Cartus Corporation (a corporate relocation firm) with 1,349 employees and Pitney Bowes (650). The city is also home to Western Connecticut State University, one of four state operated universities. The university had 4,422 full time students in fall of 2014.
GE Commercial Finance closed its leased offices recently affecting 450 employees, who, according to management, were mostly commuters. The financial impact to the city and its unemployment rate is not expected to be material.
The city's unemployment rate declined to 4.7% for April 2015 compared to 5.2% the prior year as employment and labor grew 2.4% and 2.9%, respectively. This rate compares favorably with the state (6.2%) and national (5.4%) averages. Income levels register comfortably above national average but remain below the above-average Fairfield County and state levels.
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