OREANDA-NEWS. Fitch Ratings has assigned the following ratings to the Borough of Naugatuck, Connecticut (the borough):

--\\$17,235,000 general obligation (GO) bonds, issue of 2015 'AA';
--\\$8,000,000 GO bond anticipation notes (BANs) 'F1+'.

The bonds and BANs will be sold competitively on Sept. 15. Proceeds of the bonds and the BANs will finance various school renovations, bridge repairs, road and infrastructure improvements, and wastewater treatment facility improvements.

Fitch also affirms the 'AA' rating on the borough's outstanding GO bonds, series 2002 and GO pension bonds, series 2003.

The Rating Outlook is Stable.

SECURITY
The bonds and BANs are a general obligation of the borough backed by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS
SOLID FINANCES AND BUDGET PERFORMANCE: Finances are well managed as evidenced in the borough's history of achieving positive operating results and maintenance of reserves ranging from 8%-12% of spending. The general fund budget is largely funded by property taxes which the borough has the capacity to increase without limitation resulting in good revenue raising capacity.

MANAGEABLE LONG-TERM LIABILITIES: Debt levels are expected to remain moderate considering the pace of outstanding principal amortization and potential new issuances. Pension obligations are relatively well funded reflecting the issuance of pension obligation bonds (POBs) in 2003 that represent roughly one-third of the borough's overall debt burden. Carrying charges for debt and retiree pension and health obligations consume an affordable share of the operating budget.

ECONOMIC PRESSURES PERSIST: Housing market conditions remain weak and unemployment remains above the CT and U.S. rate consistent with historical performance. Key income metrics lag those of the wealthier state, but measure well against national standards. The borough's population has been stagnant for some time and growth in the grand list (or tax base) has been very modest.

BAN RATING LINKED TO GO: Repayment of BANs is dependent on future market access for the borough, which Fitch assesses by analyzing its overall creditworthiness. The 'F1+' short-term rating corresponds to the 'AA' rating on the borough's outstanding GO bonds.

RATING SENSITIVITIES
BUDGETARY BALANCE: The consistency of the borough's financial performance remains the key strength supporting its 'AA' GO rating; conversely, challenges related to a stagnant economic base and lack of revenue generation from new development are a potential risk.

CREDIT PROFILE
Naugatuck encompasses a land area of 16.2 square miles in east central Connecticut (CT) along state route 8, approximately five miles south of Waterbury and within 35 miles of New Haven, Bridgeport, and Hartford. The borough's 2013 population is estimated at 31,786 and largely unchanged from the 1990 Census figure of 30,625.

STEADILY MAINTAINED FINANCIAL RESERVES
The borough achieved surplus operating results (after transfers) in the general fund (GF) for the sixth consecutive fiscal year in 2014, registering a \\$1.55 million (or 1.3% of spending) increase in total reserves. The unrestricted GF balance (the same as the total fund balance) was \\$15.2 million or 13.1% of spending. The GF unrestricted or unreserved fund balance has been very steady over the prior decade, equal to no less than 7.8% of spending (in FY 2005). The borough's formal fund balance policy calls for an unassigned fund balance between 8% and 12% of the GF budget. Financial results for FY 2015 are not yet available, but management indicated it expects to record a modest operating surplus of \\$140 thousand in the GF.

TAX LEVY INCREASES SUPPORT SURPLUS BUDGETARY RESULTS
Financial stability has largely been achieved through conservative forecasting and careful management as year-end results have consistently outperformed the budget. Revenue growth has largely stemmed from management's willingness to increase the tax rate. The borough's tax levy has increased at a compound annual growth rate (CAGR) of 4.0% from fiscal years 2005-2014, ahead of the 1.3% CAGR in the tax base. The borough may adjust its tax levy and tax rate without limitation, enhancing management's overall budgetary flexibility. Property tax revenues funds 60%-65% of the GF budget.

BUDGET REFERENDUMS REVEAL INCREASED SENSITIVITY TO TAXES AND ECONOMY
Recent years' budgets have been challenged by voters pursuant to provisions under the borough charter. The charter provides for up to three referendums on the budget (subject to certain petition requirements) at which point the borough could adopt a budget without challenge. While not uncommon in CT voters' response to the budgets appear to signal an increased level of dissatisfaction with the level of taxes and spending in the borough.

The borough reduced spending and the tax levy modestly in response to the first referendum rejecting the fiscal 2016 budget. The second budget adopted by the borough faces a referendum later this month; that budget would increase spending by 2.5% from the prior year adopted budget with cost increases driven by insurance and education funding. The budget appropriates \\$1.46 million of existing fund balance, as originally proposed, representing the amount of fund balance above the 12% upper policy limit. Property taxes are budgeted to increase 3.8% due to a combination of an increase in the tax rate (2.9%) and growth in the tax base (0.7%). The borough's 2013 equalized tax rate, as reported by the CT Office of Policy and Management, was the sixth highest in the state largely reflecting the boroughs' lower property wealth.

The borough continues to feel the aftereffects of the most recent recession, most notably in a shaky housing market where median prices (as reported by Zillow Group) remain considerably below pre-recession peaks. The borough's preliminary July unemployment rate of 6.2% is still somewhat high relative to the state (5.6%) and U.S. (5.3%). The borough's local economy has historically been dominated by manufacturing but has recently started to diversify into healthcare and a larger retail presence. Resident employment is showing good momentum with gains of 3.2% in 2014 and 3.0% year-over-year (yoy) as of July 2015. Income indicators in the borough are comparable to the surrounding New Haven region and the nation but trail the wealthier statewide norms.

MANAGEABLE LONG-TERM LIABILITIES
On a combined basis, Fitch views the borough's long-term liabilities as manageable. Fitch estimates overall debt at \\$3,469 or 4.9% of market value. The borough's pension plans are well funded owing to the issuance of \\$49.3 million in POBs in 2003 - the POBs account for 35% of the overall debt burden. The borough's pension plans, which are closed to new hires, were reported as 90.4% funded on a combined basis as of Jan. 1, 2014. The Fitch-adjusted funded ratio is estimated at 81.4%, substituting the 8.0% investment rate of return assumed by the borough with a 7.0% rate, and the adjusted unfunded actuarial accrued liability (UAAL) is \\$30.7 million or a moderate 0.7% of market value. From a budgetary perspective the cost of funding the borough's debt service, pension costs, and other post-employment benefits (OPEB) is affordable, equal to 11% of governmental fund spending in FY 2014.

The UAAL for OPEB was reported at \\$146 million or a high 6.5% of market value. Fitch generally views an issuer's OPEB liability as a more flexible obligation relative to debt and pension. Notably the borough has reached agreement with the board of education employees on higher employee contributions for health coverage that should have a beneficial impact on the OPEB UAAL. The borough is in the midst of negotiations with its other labor groups.

DEBT PLANS CENTER ON WWTP & INCINERATOR UPGRADES
Other than state-supported school construction needs the borough's capital plans center on approximately \\$12 million of improvements to its wastewater treatment plant (WWTP) and incinerator stemming from new state environmental guidelines. The current offering will fund \\$2.1 million in WWTP project costs; the timing for the incinerator improvements has not been determined. A significantly larger overhaul for the WWTP is estimated at \\$50 million; the schedule for this project is also unclear, as is the borough's ultimate cost given the expectation for partial grant funding. The extent to which the issuance of additional bonds for this project results in a materially higher debt and tax burden will be considered in future rating decisions but the debt is likely to be tax-supported. The borough amortizes about \\$5.5 million to \\$6 million in principal related to its outstanding bond and lease obligations annually creating capacity to accommodate future issuances.

The borough's WWTP and incineration facility are operated by a private firm, Veolia Water North America (Veolia), through a contract terminating in 2022. The borough filed suit against Veolia in 2013 over the calculation of revenue sharing payments to the borough, and Veolia subsequently filed a counterclaim reportedly related to the reimbursement of prior insurance costs. Management has stated it has set funds aside for the Veolia claim, in the event of an adverse ruling. The litigation is in discovery, with no trial date established. Fitch does not expect this litigation to have a material impact on the borough's credit quality.