Fitch Affirms Groton, CT's IDR and GOs at 'AA'; Outlook Stable
--$7,680,000 GO bonds, issue of 2014, lot A;
--$225,000 GO bonds, issue of 2014, lot B (Taxable).
In addition, Fitch has affirmed the town's Issuer Default Rating (IDR) at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are backed by the town's full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
The 'AA' IDR and GO ratings reflects Fitch's expectation that the town will maintain healthy financial flexibility through economic cycles by using a combination of its expenditure control and revenue raising ability. Fitch expects the town's long-term liability burden to remain low based on modest capital needs and a well-funded town-managed pension plan.
Economic Resource Base
The town of Groton, located in southeastern Connecticut, is a mature community with a 2015 population of approximately 39,700 that has been nearly unchanged for more than a decade. The town's location on local waterways serves as an important driver of economic activity due to the presence of the Naval Submarine Base New London and General Dynamics' Electric Boat Corporation. The town's economy is also heavily influenced by the sizeable presence of Pfizer.
Revenue Framework: 'a' factor assessment
The town's primary revenue source is property taxes. General fund revenue growth over the past 10 years has trailed both U. S. GDP and CPI for the same period, reflecting some volatility in the tax base due in part to its commercial and industrial concentrations. Fitch expects revenue performance to be stagnant, as the tax base is expected to continue to contract in the near-term with long-term growth expectations muted. The 'a' rating also considers the town's unlimited taxing authority.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending growth is expected by Fitch to be above that of revenues given expectations for sluggish revenue growth. Carrying costs for long-term liabilities claim a low proportion of government spending. The town has adequate controls over employee headcount and wages, and has demonstrated the flexibility and willingness to cut spending during economic downturns.
Long-Term Liability Burden: 'aaa' factor assessment
Fitch anticipates the town's long-term liability burden to remain low based on a manageable capital plan and a history of full funding of its pension actuarially determined contributions.
Operating Performance: 'aaa' factor assessment
Fitch expects the town to manage through periods of economic decline while maintaining a sound financial cushion on the basis of its superior budgetary flexibility and adequate reserves.
RATING SENSITIVITIES
Financial Flexibility: The IDR and GO ratings are sensitive to the town's continued ability to maintain financial flexibility including adequate reserves in light of weak revenue performance expectations.
CREDIT PROFILE
Groton's economy is characterized by its dependence on several large commercial employers and the presence of the U. S. Navy. Each of these entities has a long-standing presence in the town. Growth prospects for Electric Boat are positive, with various submarine development and construction projects underway. Furthermore, a five-year $1.85 billion Ohio Replacement Contract stipulates that Electric Boat will perform research and development for a new class of ballistic-missile submarines. Electric Boat projects up to 4,000 more employees by 2030. Pfizer's status within the town has diminished greatly over the last decade; however, the Groton campus remains the firm's largest research and development center despite demolishing a large building in 2013. Pfizer and Electric Boat account for a high 13% and 7%, respectively of the town's fiscal 2015 $5.4 billion tax base.
Income levels for the town remain above national averages and the level for New London County, but are below state levels. The unemployment rate is generally below state and national averages.
Revenue Framework
Property taxes represent the primary revenue source for the town, at approximately 68% of fiscal 2017 budgeted general fund revenues. State aid has been subject to cuts recently and represents approximately 26% of fiscal 2017 budgeted general fund revenues.
Fitch expects tax base growth to continue to be below the level of inflation over time. Housing values have experienced only modest gains since 2013 (roughly 2% per year), according to Zillow. com, and Zillow projections call for values to remain similar to prior year trends. The grand list is revalued every five years with minimal changes in between for property improvements or new additions and tax appeals, but not the results of sales of property. Management indicated that preliminary estimates for the upcoming revaluation effective for fiscal 2018 point towards a 7% decline in the tax base. The last revaluation was Oct. 1 2011 for fiscal 2013 and resulted in a moderate 4% decline in taxable value.
Management has the independent ability to raise taxes without limit and has made increases in its tax levy when needed to meet expenditure growth.
Expenditure Framework
The bulk of the town's general fund spending responsibility is for education, followed by public safety, and management has kept growth in these costs at a moderate level.
Expense growth is expected by Fitch to be above that of revenues without policy action given Fitch's expectations for weak revenue performance.
The town maintains a solid level of expenditure flexibility. Fixed carrying costs for debt service, pension and OPEB are low at approximately 9% of governmental spending. In 2008 the town established an OPEB trust fund to prefund the liability; since 2012, the town's annual contribution met or exceeded the OPEB ARC. The annual overfunding of OPEB obligations provides some additional budgetary flexibility for the town in the sense that this spending may be cut in response to a temporary decline in revenue.
Management has the legal ability to reduce non-public safety staff at any time if necessary. Union contracts are subject to arbitration but a decision may be rejected by a two-thirds vote by town 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.
Additionally, the town maintains some flexibility via its policy of annual funding of a capital reserve ($744,000 in the adopted fiscal 2017 budget) as well as a routinely budgeted contingency ($425,000 in the fiscal 2017 budget) that collectively equal about 1% of fiscal 2017 budgeted spending. Furthermore, the town points towards its support funding for its political sub-divisions' public safety - which is not required by charter - as an additional source of budgetary flexibility if required.
State legislation was passed last year imposing a 2.5% spending 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 is projecting to receive $433,177 (less than 1% of budgeted general fund revenues) from this grant in fiscal 2017. Fitch does not believe it will have a notable impact on its financial operations based on the town's historically conservative budget practices.
Long-Term Liability Burden
Long-term liabilities for debt and unfunded pensions represent a low 3.7% of personal income. The debt load is comprised almost entirely of the town's debt but also includes a small portion of overlapping debt. Amortization of debt is rapid, at about 76% of principal retired in 10 years. Fitch expects liability levels to remain low given the town's moderate borrowing plans and its commitment toward full funding of its annual pension contribution.
The town is planning to present a $184 million school facilities bond referendum to voters in November 2016. Management estimates the net cost to the town to be roughly $84 million (after state grants). If approved by the voters, the borrowing would be phased in over several bond issues. The project entails 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 level consistent with the 'aaa' long-term liability assessment.
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 Teacher's 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 2% of personal income.
Operating Performance
Fitch views the town as having exceptionally strong gap-closing capacity given its superior inherent budget flexibility and demonstrated commitment to generally maintaining reserves at its 7.75% policy level. Fitch considers the town's reserve policy level as sufficient for a 'aaa' financial resilience assessment.
Budget management at times of economic recovery has generally been strong. After two years of surplus financial operations, the town ended fiscal 2015 with an operating deficit (after transfers) of about $1.7 million (1.3% of spending), dropping unrestricted reserves to $16.8 million or 13% of spending. The deficit was primarily due to the town's practice of using fund balance for tax relief purposes; the millage rate was reduced in fiscal 2015 resulting in lower tax revenue (about $3.3 million or 4% less than the prior year). Additionally, the town experienced a $2.8 million (6%) reduction in intergovernmental revenue.
Management estimates using approximately $5.3 million of fund balance in fiscal 2016, which would drop unrestricted reserves to about $11.4 million, roughly 9% of spending, and remains compliant with its fund balance policy. Factors impacting fiscal 2016 results are declines in tax revenues (primarily attributable to the loss of the Pfizer building 118), mid-year state aid reductions, and federal aid reductions.
The fiscal 2017 adopted budget totals about $122 million, and is a 3% decrease ($4.2 million) from the fiscal 2016 budget. Included in the budget is a $666,693 fund balance appropriation, and the millage rate increases from 20.95 to 21.73 (a 3% increase). Management has indicated their expectations are to maintain the unassigned fund balance at the policy level over the intermediate term.
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