OREANDA-NEWS. Fitch Ratings assigns an 'AA-' rating to the following general obligation (GO) bonds for the city of Worcester, Massachusetts (the city):

--$41,492,604 GO municipal purpose loan of 2015 bonds, series A;
--$17,385,527 GO municipal purpose loan of 2015 bonds, series B;
--$22,620,000 GO refunding bonds, series 2015C.

The bonds are scheduled to sell competitively on Dec. 2. Proceeds of the series A bonds will be used for various city, school and water and sewer capital improvements; series B bond proceeds will be used to retire bond anticipation notes supporting CitySquare projects; and series C bonds will refund a portion the city's outstanding series 2007, 2005C and 2005D GO bonds.

In addition, Fitch affirms its 'AA-' rating on the city's outstanding $630 million of 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 and a property tax levy that is limited by state statute.

KEY RATING DRIVERS

SOUND FINANCIAL PERFORMANCE: Positive financial results over the past five fiscal years have led to growth in the city's reserve levels to satisfactory levels. Financial flexibility is enhanced by management's maintenance of a cushion under the primary and secondary property tax cap.

SIZABLE FUTURE RETIREE COSTS: Unfunded employee benefit obligations are very large, but the city continues to manage these commitments and consistently funds its required pension contributions. Total carrying costs are moderate.

ECONOMY BOLSTERED BY STRONG INSTITUTIONS: The city benefits from the presence of well-established higher education and healthcare institutions attracting ancillary businesses and providing stability to the economy.

STRONG MANAGEMENT PRACTICES: The city's recent history of positive operating results is a reflection of its strong financial management, prudent fiscal policies and conservative budgeting practices.

POSITIVE ECONOMIC DEVELOPMENT: Major development projects underway or recently completed in the city are contributing to measurable economic growth and are expected to boost taxable values modestly.

MIXED SOCIOECONOMIC FACTORS: Local unemployment rates have seen notable improvement as job growth has exceeded national growth rates the past few years. Wealth levels are below state and national averages but levels are skewed somewhat due to the large student population.

RATING SENSITIVITIES

CONTINUED BALANCED OPERATIONS: The rating is sensitive to shifts in fundamental credit characteristics, including the city's strong prudent budgeting practices, maintenance of adequate reserves and ability to address growing employee benefit costs.

CREDIT PROFILE

Worcester is located roughly 40 miles west of Boston and serves as the economic hub of central Massachusetts. Significant economic development efforts in the last several years have led to increased investment in the city and continue to attract new business ventures and residential projects. The city's population of 183,016 is up 1.4% over five years and 6% since 2000.

FINANCIAL FLEXIBILITY IMPROVES

The city's finances continue to be sound as general fund operations have resulted in a trend of surpluses since fiscal 2010. The city experienced a general fund operating surplus (after transfers) of $4.4 million (0.7% of spending) in fiscal 2014 following a $3.6 million surplus (0.6% of spending) in fiscal 2013. The city's unrestricted general fund balance at fiscal 2014 year-end totaled $27.9 million or an adequate 5% of operating expenditures on a budgetary basis (in compliance with the city's policy of 5%). The positive results stemmed from motor vehicle and other excise taxes outpacing conservative projections, and expenditures across all areas coming in less than anticipated.

The $575 million fiscal 2015 budget reflected increases in education costs of 2% and moderate increases in debt (3.3%), pension (6.8%) and health insurance (3.5%) costs. Estimates for non-property tax revenues were conservatively estimated at below fiscal 2014 actuals for most categories, reflecting continuation of prudent budget practices. A contingency for expected costs associated with open labor contracts was also included.

Management is projecting a modest surplus of $350,000 for fiscal 2015. Results would have been stronger but additional snow removal costs of $1.6 million were incurred due to historic snowfall levels and amounts not reimbursable from FEMA. Ad valorem tax collections came in below expectations due to certain tax refunds made for appeals, although motor vehicle excise taxes continued to outperform budget. Conservative expenditure assumptions resulted in positive variances in most departments.

The fiscal 2016 budget of $598 million reflects increases in education costs of 4.6% as a result of an increase in state aid and an additional $1 million city contribution over the required minimum; the budget also includes modest increases in debt (5%), pension (2.1%) and health insurance (2.1%) costs. Estimates for non-property tax revenues were again conservatively estimated at below fiscal 2014 actuals for most items.

A contingency for expected costs associated with certain labor contracts still unsettled was increased by $1.8 million. The city reports that it has only one major contract unresolved currently, and that there is sufficient contingency built into the budget based on results of other bargaining group negotiations.

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 2015, the city levied $7.3 million below the primary levy limit and $10 million below the secondary limit - the additional amount that may be levied without voter approval.

The city has historically kept a $10 million cushion below its secondary limit. Fitch expects the city to retain the financial flexibility that this cushion affords going forward based on management's history of conservative budgeting practices.

EXPANDING ECONOMY

A number of commercial and residential projects have been completed in the city over the last five years. The city continues to have numerous projects in various stages of development, adding to the revitalization of downtown. The largest of these are the $565 million multi-phased mixed-use CitySquare project and $100 million expansion of the city's rail terminal, increasing freight rail options to the city and express train service to Boston. Two new major hotel projects are underway and follow the recent completion of a new Hampton Inn. Rehabilitation projects have provided new office, retail and residential development, spurring additional investment from developers.

The city's taxable assessed value (TAV) of $11.24 billion grew marginally by 3.3% over the past three years. Fitch believes prospects for moderate incremental growth over the near term are reasonable given ongoing development city-wide.

MIXED SOCIOECONOMIC INDICATORS; STRONG JOB GROWTH

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 30,000 and is comprised 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 12,906 employees, followed by UMass Medical School (4,400), Reliant Medical Group (2,604) and Saint Vincent Hospital (2,331).

Worcester has experienced significant job growth during 2014 and 2015 of 2.6% and 3.2% respectively, outpacing national job growth figures of 1.7% and 1.5% for the same years. The unemployment rate declined to 5.6% in August 2015, down from 7.1% a year prior and equal to pre-recession levels. The city's wealth levels have historically been below state and national averages, partially due to the large student presence.

MODERATE DEBT LEVELS, LARGE FUTURE RETIREE COSTS

Overall debt ratios, excluding self-supporting debt, are moderate at $3,044 per capita and 4.8% of 2015 equalized value of $11.6 billion. Debt amortization is rapid with 66% paid off in 10 years.

The city's combined long-term liabilities related to retiree benefits are large. The city administers the Worcester Retirement System, a defined benefit plan for certain employees, excluding teachers. The assumed rate of return was lowered in 2015 to 7.625% from 7.75%, which contributed to the increase in the liability by $16 million. The city's unfunded pension liability totaled $408 million as of Jan. 1, 2015, up from $400 million the year prior. The total represents a moderate 3.7% of TAV. Using Fitch's conservative 7% discount rate assumption, the estimated pension plan funding level was a low 63%.

Fitch notes as a credit positive the city's practice of consistently funding its pension ARC. Pension expenses are charged to respective departments and enterprise funds across the city and for fiscal 2016 the tax levy impact to cover the increase in pension costs was a modest $500,000. The city is making recommended contributions subject to a 4% annual increase that are projected by the city's actuaries to result in full funding by June 30, 2034 (18 payments remaining).

The city's unfunded other post-employment benefits (OPEB) liability totaled $728 million as of July 1, 2013, equal to a high 6.5% of TAV. This total is up $91 million from the 2011 valuation due to a combination of changes in mortality assumptions, an added excise tax as a result of the Affordable Care Act, and an increase in the implicit subsidy for pre-Medicare retiree costs.

The city has successfully negotiated with the bulk of its bargaining groups for increases in employee deductibles, co-pays and changes in prescription coverage. Additionally, the city has lowered its provider costs. These and other plan changes are anticipated to control future healthcare costs and partially reduce the outstanding liability. An updated valuation will be available early next year.

The city established a restricted OPEB account in fiscal 2011 and has begun making contributions in excess of its pay-go costs. The city contributed $1.4 in fiscal 2015, increasing the balance to an estimated $8.5 million, a modest amount relative to the liability. OPEB contributions in fiscal 2014 totaled $23 million, or 50% of the ARC.

Total fiscal 2014 carrying costs, comprised of debt service, pension and OPEB contributions, equaled a moderate 15.5% of total governmental fund spending.