OREANDA-NEWS. March 24, 2016. Fitch Ratings has affirmed at 'AA' the following Town of Groton, Connecticut's (the town) general obligation (GO) bonds:

--\\$8,315,000 GO bonds, issue of 2014, lot A;

--\\$300,000 GO bonds, issue of 2014, lot B (Taxable).

The Rating Outlook is Stable.

SECURITY

The bonds are backed by the town's full faith and credit and unlimited taxing authority.

KEY RATING DRIVERS

STRONG FINANCIAL PRACTICES: The town's long standing strong financial management practices is a key credit strength and a mitigant to its concentrated economy. The town consistently reports a satisfactory financial cushion supported by independent revenue raising flexibility, conservative budgeting and a demonstrated ability to adjust spending in response to revenue declines.

LOW DEBT; MANAGEABLE RETIREMENT COSTS: Fitch expects Groton's debt ratios to remain low as future debt plans are moderate. The town's contribution consistently matches the actuarial requirements for its pension and other post-employment benefits (OPEB) plans. Overall carrying costs for long-term liabilities are low despite rapid amortization of debt and full funding of the OPEB annual required contribution (ARC).

IMPROVED EMPLOYMENT PICTURE; HIGH CONCENTRATION: After a prolonged period of decline, employment grew modestly in 2014 and 2015. The town's employment base, driven by the presence of the U.S. Navy, Electric Boat, and Pfizer, is highly concentrated from both an employment and tax base standpoint.

RATING SENSITIVITIES

CONCENTRATED TAX BASE

The town's ability to manage its finances and maintain adequate reserves at or close to current levels is a key rating factor because of the highly concentrated tax base. The Stable Outlook reflects Fitch's expectation for continued prudent budgetary management supported by the town's satisfactory reserve levels and ability to raise revenues.

CREDIT PROFILE

The Town of Groton is located in southeastern Connecticut with the 2014 population of 40,167 remaining relatively flat since the 2000 census. The town's location on local waterways serves as an important driver of economic activity. The town is adjacent to the Thames River on the west, the Mystic River on the east, and the Long Island Sound is located directly to the south.

HIGHLY CONCENTRATED ECONOMIC BASE

The town's economy is heavily influenced by the sizable presence of the Naval Submarine Base New London (the base), General Dynamics' Electric Boat Corporation, and Pfizer. Collectively these firms employ 21,522 in the town (as of June 30, 2015). Pfizer and Electric Boat account for a high 13% and 6.6% of the town's \\$5.4 billion tax base, respectively.

Each of these entities has a long-standing presence in the town. Electric Boat has plans to construct nine Virginia-Class submarines from 2019 to 2023. Additionally, under a five-year \\$1.85 billion Ohio Replacement Contract, Electric Boat will perform research and development for a new class of ballistic-missile submarines to replace the Navy's current force of 14 Ohio-class submarines. Electric Boat projects an additional 1,800 employees in 2016 and up to 4,000 more by 2030. Pfizer's Groton campus remains the firm's largest research and development center despite demolishing a large building in 2013.

The employment picture for the town has improved somewhat, with modest 0.4% and 0.8% employment growth in 2015 and 2014, respectively, reversing a prolonged period of decline. The town's December 2015 unemployment rate of 4.7% was below that of the state's 4.9% and nation's 5%. Median household and per capita income levels as of 2014 were 113% and 120% of national levels and 86% and 89% of state levels, respectively.

PRUDENT MANAGEMENT; SATISFACTORY FINANCIAL CUSHION

The town's history of generally sound financial performance and revenue raising flexibility softens the overall credit risk associated with its concentrated economic base. General fund operating results consistently produce an adequate cushion with unreserved or unrestricted fund balance maintained between 8% and 14% of spending in each of the last five years.

After two years of surplus financial operations, the town ended fiscal 2015 with an operating deficit (after transfers) of \\$1.7 million (or 1.3% of spending), dropping unrestricted reserves to \\$16.8 million or 13% of spending. The deficit was primarily because of a reduction in the millage rate, which resulted in lower tax revenue (\\$3.3 million or 4% less than the prior year), and a \\$2.8 million (6%) decrease in intergovernmental revenue. Property taxes are the largest revenue source at 63% of general fund revenues.

The fiscal 2016 budget was balanced with an appropriation of \\$5 million of fund balance for tax relief purposes. A major factor impacting fiscal 2016 was the loss of Pfizer building 118, resulting in a 2% decline in the Oct. 1, 2014 Grand List, and a \\$1.8 million decrease in property tax revenue in fiscal 2016. Based on current estimates, the amount of fund balance appropriated will increase to \\$5.4 million (4.3% of budgeted spending) due to revenue budget shortfalls, including declines in tax revenue (\\$382,000) as well as state and federal aid (\\$940,000). Management estimates the ending unrestricted fund balance will be \\$11.3 million, or a satisfactory 9% of spending, and remains compliant with its 7.75% unassigned fund balance policy.

The proposed fiscal 2017 budget is a 0.1% decrease from the prior year, and includes a proposed 8.3% increase in the millage rate to 22.68 from 20.95. It is balanced with the use of \\$247,434 of fund balance (less than 1% of spending). As expected by management, the Oct. 1, 2015 Grand List decreased by \\$18.3 million (0.5%) which captured the remaining effects of the Pfizer building demolition. The Pfizer building has now been completely removed from the town's Grand List.

The town maintains additional flexibility via its policy of annually funding a capital reserve; the town's fiscal 2017 proposed budget includes a \\$2.9 million contribution to this fund. In the event of fiscal pressure, the level of annual funding could be adjusted as necessary to alleviate budget pressure. The town also has a \\$550,000 contingency budgeted in fiscal 2017, which can be transferred to any other account upon town council approval.

Fitch believes the town also maintains a good deal of revenue raising flexibility that positions it to offset tax base declines or other unforeseen operating challenges. The town's tax rate is regionally competitive and there are no legal limitations on tax increases.

LOW LONG-TERM LIABILITY BURDEN

The town's overall debt burden is low at \\$1,530 per capita and 1.1% of market value. The 2017 - 2022 capital improvement program totals \\$117 million and calls for an additional \\$37 million in debt financing (yet to be approved by voters). Other funding sources for the plan include the capital reserve fund, grants, and reimbursement from the state. This additional debt should not have a material effect on the town's modest debt profile. Not included in the CIP is the potential for an additional \\$55 million of debt for the town's portion of the Board of Education re-districting/re-alignment program, yet to be approved by town council. The proposal is also contingent on voter approval, with a possible referendum in November 2016, and includes the construction of one new middle school and the conversion of two middle schools into elementary schools. The proposed new debt is not expected to increase the town's overall debt burden above the moderate range.

All town employees, excluding teachers, participate in the town's agent multiple-employer defined benefit plan, the Town of Groton Retirement System (TGRS). The town is one of three employers participating in TGRS. The town's contribution to TGRS consistently matches the actuarial requirement. Using GASB 68 reporting, the ratio of assets-to-liabilities at June 30, 2015 improved to 88.7% from 79.6% the prior year, or a Fitch-estimated 82% from 71.7% using a 7% discount rate assumption. Fitch expects the town to continue to make full actuarial contributions given past practices. Board of Education teachers participate in the State Teachers' Retirement System, a cost-sharing pension plan, for which the state is solely responsible for all contributions.

OPEB liabilities are manageable with the total unfunded liability of \\$34.7 million less than 1% of market value. In fiscal 2008 the town established an OPEB trust fund to prefund the liability; since fiscal 2012, the town's annual contribution met or exceeded the OPEB ARC. As of June 30, 2015, the town's OPEB trust had \\$13.4 million in assets. The annual overfunding of OPEB obligations provides some additional budgetary flexibility for the town.

Carrying costs for debt service, pension, and OPEB ARC totaled a low 9.2% of total governmental fund spending in 2015 despite rapid principal amortization of 77% within 10 years.