Fitch Affirms Meriden, CT's GO Bonds at 'AA-'; Outlook Stable
--$82.4 million general obligation (GO) bonds, series 2008, 2012, 2013, 2014A and 2014B;
--Issuer Default Rating (IDR).
The Rating Outlook is Stable.
SECURITY
The bonds are a general obligation of the city and are payable from the city's full faith and credit and unlimited taxing authority.
KEY RATING DRIVERS
The 'AA-' rating reflects Meriden's superior budget flexibility evidenced in an unlimited legal ability to increase property taxes and a solid legal and practical capacity to adjust spending, if necessary. The rating also considers the city's sound budget management practices and moderate long-term liability. These strengths are balanced against the city's stagnant tax base and natural pace of revenue growth which could contribute to operating gaps absent policy action over time.
Economic Resource Base
Meriden covers an area of 24 square miles in central Connecticut, approximately 20 miles south of Hartford and 20 miles north of New Haven. The city is fairly mature and largely residential with a stable population over the past decade, fluctuating around 60,000 people.
Revenue Framework: 'a' factor assessment
The general fund's 10 year revenue growth rate has been below both the level of inflation and national GDP and Fitch expects continued muted revenue growth, reflecting a tax base that continues to contract. The city, like all Connecticut local governments, maintains unlimited legal taxing authority.
Expenditure Framework: 'aa' factor assessment
Fixed carrying costs associated with debt and retiree benefits are low, providing solid expenditure flexibility. Management maintains moderate legal control over wages and benefits in labor contracts and advantageous terms regarding conflict resolution and headcount.
Long-Term Liability Burden: 'aa' factor assessment
The combined burden of debt and net pension liabilities is moderate relative to personal income. The pension plans and retiree health benefits are closed to new hires, which Fitch expects to limit long-term liability growth going forward. School-related borrowing in the near term will not significantly impact the combined burden.
Operating Performance: 'aaa' factor assessment
The city maintains what Fitch considers adequate reserves levels relative to its inherent budget flexibility and revenue volatility, and has demonstrated sound budge management consistently generating modest operating surpluses.
RATING SENSITIVITIES
Changes in Economic Trends: Population and economic expansion that supports a long-term expectation for increased general fund revenue growth absent policy action could support a consideration for positive rating action.
CREDIT PROFILE
Meriden is situated in close proximity to both Hartford and New Haven. Local industry is largely focused on manufacturing and health care but there is sufficient diversity among the city's top 10 taxpayers, which comprise a moderate 8.3% of the city's fiscal 2015 tax base. . However, resident income and employment metrics tend to perform more poorly than the region and the state. Prospects for new construction and tax base growth are uncertain, however, the under-construction New Haven/Hartford/Springfield rail line which includes a $20 million station in the city (fully funded by the state) could stimulate private sector investment over time.
Revenue Framework
Property taxes make up close to 60% of general fund revenues followed by state and federal sources which may be subject to periodic shifts due to respective budgetary considerations and policy action. The city retains broad control to adjust the local component of general fund revenue and has demonstrated its willingness to make significant changes to millage rates on an annual basis in response to spending needs and tax base fluctuations.
Absent policy action, Fitch expects the natural pace of general fund revenue growth to lag both inflation and national GDP. The city's 10 year compound annual growth rate for general fund revenues is below both of these indicators and includes tax rate adjustments to compensate for tax base contraction. The most recent revaluation for fiscal 2013 resulted in a 10.25% drop in the tax base followed by smaller contractions in the two subsequent years.
The city has an unlimited legal ability to raise revenues. The yearly budget is subject to voter referendum if a successful petition is filed, but the city maintains the independent ability to implement a budget after a single referendum, if necessary.
Expenditure Framework
Education is the city's largest general fund expenditure comprising around 55% of fiscal 2015 expenditures followed by public safety at approximately 19%. Given the stagnant prospects for natural revenue growth absent policy action, Fitch expects the natural pace of spending growth to be above revenue growth.
The city's expenditure flexibility is viewed as solid. Management reports education spending flexibility in both labor and operational costs and fiscal 2015 carrying costs for debt service, pension and other post-employment benefits (OPEB) payments are low at 9.3% of governmental fund expenditures.
Management has the legal ability to reduce staff at any time if necessary. Union contracts are subject to arbitration but a decision may be rejected by a two-thirds vote by city council. A new arbitration panel would then be appointed by the state and their subsequent decisions are required to take into consideration the financial capability of the employer.
State legislation was passed last year imposing a 2.5% cap on local governments' general spending growth budgets beginning in fiscal 2018. The cap limits annual increases to 2.5% over the spending level for the previous fiscal year, or the rate of inflation, whichever is greater. The cap excludes expenditures for debt service, special education, court orders and arbitration awards. There is an exception for major disasters provided there is a presidential or gubernatorial declaration of emergency. Towns and cities that increase their general budget expenditures over the previous fiscal year by an amount that exceeds this cap receive a reduced municipal revenue sharing grant. The reduction is equal to 50 cents for every dollar the local government spends over the cap. Management expects to be able to keep expenditure growth within this cap based upon recent years' performance.
Long-Term Liability Burden
The city's combined long-term liability burden for debt and pensions is moderate at 11.9% of personal income. The metric is almost equally comprised of direct debt of the city and the net pension liability related to several single-employer defined benefit pension plans.
Meriden administers three separate pension plans for its general employees, police and fire. The net ratio of assets to liabilities is 67.1% but falls to approximately 60.4% when adjusted to a more conservative 7% discount rate by Fitch. Fitch would expect to see gradual improvement in the funded position of the pension plans given reforms that have eliminated eligibility for new hires and the city's practice of fully funding the actuarially-based annual contribution.
The city plans to issue roughly $60 million of new debt in fall 2016. Fitch does not expect this upcoming issuance to materially affect the overall long-term liability level due to above-average amortization of outstanding debt of 63.7% in 10 years.
Operating Performance
The city has maintained a general fund balance of at least 8% of expenditures and transfers out since fiscal 2011 in line with its policy of keeping one month of expenditures in reserve. Fitch views the fund balance policy as consistent with a 'aaa' level of financial resilience taking into consideration scenario-estimated changes in revenue in a moderate economic downturn and the city's superior level of budget flexibility.
After receiving a Connecticut Resource Recovery Authority reimbursement in fiscal 2009, the city has maintained adequate reserves without the deferral of required spending. The city has modestly added to fund balance in six out of the past seven years to remain in line with reserve policy levels and expects another modest surplus in fiscal 2016.
The adopted fiscal 2017 budget is balanced without reliance on existing reserves. The budget is $2.9 million (or 1.5%) higher than the previous year, largely as a result of increased debt service payments related to high school renovation borrowing.
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