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

--$4,420,000 general obligation (GO) refunding bonds, issue of 2016 at 'AA';
--$8,000,000 GO bond anticipation notes (BANs) at 'F1+'.

The bonds and BANs will be sold via negotiation on March 15. The bonds are being issued to refund portions of the borough's outstanding series 2006A and series 2010 bonds for debt service savings. The BANs are being issued to finance various school renovations.

Fitch also affirms the following ratings on the borough:

--$52.7 million outstanding series 2002, series 2003, and series 2015 GO bonds at 'AA';
--$8 million outstanding BANs maturing March 24, 2016 at 'F1+'.

The Rating Outlook is Stable.

SECURITY

The bonds and BANs are general obligations 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 by the borough's history of achieving positive operating results and a history of maintenance of reserves ranging from 8%-13% of spending.

MANAGEABLE LONG-TERM LIABILITIES: Debt levels are expected to remain at moderate levels 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. 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 levels, although improved, remain above the CT and U.S. rate consistent with historical performance. Key income metrics lag those of the wealthy 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 almost exclusively 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 potential risks.

CREDIT PROFILE

Naugatuck encompasses a land area of 16.2 square miles in east central Connecticut along state route 8, approximately five miles south of Waterbury and within 35 miles of New Haven, Bridgeport, and Hartford. The borough's 2014 population is estimated at 31,790 and largely unchanged from the 1990 Census figure of 30,625.

STEADILY MAINTAINED FINANCIAL RESERVES

General fund results for fiscal 2015 showed a modest deficit after transfers. Transfers out included planned contributions of $1.54 million (1.3% of spending) to the borough's capital projects fund. The unrestricted general fund balance remained stable at $15.2 million or a sound 13.0% of spending. Increased expenditures for the fire department's regular and overtime salaries and higher than budgeted snow removal costs were offset by lower than anticipated insurance and benefit costs.

The GF unrestricted or unreserved fund balance has been solid over the prior decade equal to no less than 7.8% of spending (in fiscal 2005). The borough's formal fund balance policy calls for an unassigned fund balance between 8% and 12% of the general fund budget.

Financial stability has largely been achieved through conservative forecasting, annual revenue increases and careful management as year-end results have typically outperformed the budget. Property tax revenues fund 60%-65% of the general fund 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 to the level of taxes and spending in the borough and uneasiness about the pace of economic recovery.

The fiscal 2016 budget was passed after a second referendum in which the 15% of borough voter threshold was not reached. The $115 million budget increased 2% over the prior year's budget. The budget appropriates $1.46 million of existing fund balance representing the amount of fund balance above the 12% upper policy limit. The property tax levy increased 1.4% due to a combination of an increase in the tax rate (2.9%) and growth in the tax base (0.7%). The borough's 2014 equalized tax rate, as reported by the CT Office of Policy and Management, was the 7th highest in the state. The higher millage rate partially reflects the boroughs' lower property wealth; when compared against similarly sized communities the levy per capita exhibits improved comparability.

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 November unemployment rate of 5.4% is an improvement from 6.8% the prior year and is slightly higher than the state (5.0%) and U.S. (5.0%). 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 3.1% year over year as of November 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 the borough's long-term liabilities are viewed as manageable by Fitch. Fitch estimates overall debt, which includes capital leases and certificates of participation, at $3,389 per capita or 4.8% of the borough's $2.26 billion 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 40% of the overall debt burden. Principal amortization is average at 51% in ten years. The borough's future debt needs center around wastewater treatment plant and incinerator improvements stemming from new state environmental guidelines. The amount is now expected to approach roughly $5 million with borrowing anticipated over the next few years.

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 case is expected to be tried later this year.

The borough's pension plans are closed to new hires and the ratio of assets to liabilities was 82.6% as of June 30, 2015. The Fitch-adjusted funded ratio is an estimated 76.3%, substituting the 7.75% investment rate of return assumed by the borough with a 7.0% rate. The Fitch-adjusted unfunded liability is an estimated $41.8 million or 1.9% of market value. Teachers are covered by the State of Connecticut's Teachers Retirement System for which neither the borough nor the Board of Education is required to make contributions. 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 14% of governmental fund spending in fiscal 2015.

The unfunded liability for OPEB was reported at $143 million or a high 6.3% of market value as of July 1, 2014. 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 certain of its employees for higher employee contributions for health coverage that should have a beneficial impact on the OPEB liabilities. The borough is in the midst of negotiations with its other labor groups seeking similar concessions on healthcare.