OREANDA-NEWS. Fitch Ratings has assigned an 'AAA' rating to the following general obligation (GO) bonds to be issued by the city of Summit, NJ (the city):

--\$945,000 general refunding bonds of 2015;
--\$6,035,000 school refunding bonds of 2015.

The bonds will be sold via negotiation on or about March 10. Proceeds will refund the entire outstanding callable principal on the city's general refunding bonds of 2006, and school refunding bonds of 2006 for an estimated net present value savings of \$311,558 or 4.3% of the refunded bonds.

In addition, Fitch affirms the 'AAA' rating on approximately \$55.6 million of outstanding general, school, and sewer bonds of the city.

The Rating Outlook is Stable.

SECURITY

The bonds are a general obligation of the city payable from the levy of ad valorem taxes on all taxable real property in the city without limitation as to rate or amount. Bonds issued for school purposes are additionally secured by the New Jersey School Bond Reserve Act.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The city's financial management and operating results remain very stable. Reserves in excess of 20% of budget provide a considerable cushion against unanticipated budgetary challenges.

VERY HIGH WEALTH: Resident education and income measures are exceptionally strong. The city's tax base has been fairly stable and is predominantly comprised of high-priced residential properties.

PROXIMITY TO LABOR MARKETS: The city is advantageously located near numerous employment opportunities both within the city and within commutable distance to the greater New York City marketplace.

MODERATE DEBT: Debt levels are moderate overall and amortization is rapid. Capital needs are manageable and debt ratios are not expected to change materially over time. Annual carrying costs for city debt, pension, and other post-employment benefits (OPEB) are manageable, consuming less than 20% of total spending.

RATING SENSITIVITIES

FUNDAMENTAL CHANGES NOT EXPECTED: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and maintenance of healthy reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

AFFLUENT RESIDENTIAL COMMUNITY PROXIMATE TO NYC
Summit covers a total land area of six square miles in northwest Union County and has a population of 21,998. The city is about 25 miles west of downtown Manhattan, and is proximate to several interstate highways and mass transit options offering access to employment markets throughout the NYC metropolitan area. Summit is a mature community, with less than 1% of its land area classified as developable vacant land.

Residential properties represent 81% of the city's tax base and homes are highly priced with median home values nearly \$770,000 according to Zillow. Fitch estimates the city's market value in excess of an extremely high \$300,000 per capita. Resident's educational attainment and income are considerable -- 31% of the adult population holds an advanced degree, three times the national standard, and median household income of \$122,222 is equal to 171% and 230% of the NJ and U.S. benchmarks, respectively.

Employment data is not available for the city given its small population. Union County's December 2014 unemployment rate of 5.8% is slightly higher than the New Jersey rate of 5.7% and national rate of 5.4%. Overlook Medical Center, a general medical and surgical hospital and member of the Atlantic Health System, is the largest employer in the city (3,119). Merck & Co.'s Summit campus, which had once housed 2,500 employees, is now mostly vacant after the firm announced plans in October 2013 to relocate to another location in Kenilworth, NJ. Fitch is not aware of any specific layoffs related to the relocation; however, the company has laid off more than 20,000 employees or 20% of its global workforce dating back to the end of 2010.

HEALTHY FINANCIAL PROFILE

Summit concluded 2013 with a current fund (or general fund) balance equal to \$9.7 million, translating to a very strong 26.1% of spending (adjusted for the pass-thru of county and school taxes). Preliminary results for 2014 indicate the current fund balance will increase for the fourth consecutive year to \$10.1 million, the highest point in well over a decade. Liquidity is adequate with current fund cash and investments at the end of 2013 totaling \$14.1 million or almost 40% of the 2014 municipal-only budget. The city's reserve policy requires \$1.6 million-\$2 million of 'free' surplus, defined as the difference between the total fund balance and the amount of fund balance appropriated to balance the subsequent year's budget.

The 2015 budget proposal will be presented in the coming week. City officials anticipate appropriating \$7.35 million of fund balance in 2015, up from \$6.3 million in 2014. The increase is due to start-up costs associated with a new joint emergency services dispatch center and a voluntary tax agreement with Merck (see below for more information). The city does not anticipate any other material changes in the 2015 budget from last year. The appropriation of fund balance has varied between \$6.3 million - \$6.8 million from 2010-2014, but in each such year the city has fully or near fully regenerated the entire amount of fund balance appropriation. The large fund balance appropriation is largely driven by the city's very conservative estimation of uncollected property taxes.

Property taxes represent roughly 70% of current fund operating revenue. Tax collections are excellent averaging 99.2% over the prior five collection years. The annual tax levy is subject to a 2% cap (plus increases in the tax base from new construction), however, the tax cap law includes several important exclusions for capital expenditures, debt service, and increases in pension contributions and health care costs in excess of 2%, and extraordinary costs related to declared emergencies. State law also restricts growth in municipal appropriations and increases in base salary awarded through arbitration that mitigate risk associated with constraints on the city's revenue raising authority.

MERCK CLOSURE - MODEST IMPACT ON FINANCES TO DATE

Despite the closure of its research and development campus in Summit in 2014 Merck paid its full tax bill of \$1.9 million to the city (equal to 5% of municipal operating revenue). Merck remains the city's largest taxpayer. The city entered a voluntary agreement with Merck to reduce the company's 2015 tax bill by 15%; in return Merck agrees not to appeal its tax bill for the year. The agreement offers revenue certainty with respect to the 2015 budget, avoiding a potential appeal scenario and associated litigation costs. The net revenue loss to the city based on the 15% reduction is approximately \$334,000 (about 1% of municipal operating revenue).

The city plans to offset the revenue loss with an increase in fund balance appropriation rather than add that sum to the burden of the remaining taxpayers. City officials state the Merck property has received significant interest in the year it has been for sale, and are hopeful of an announcement in the coming months. Fitch believes an outcome contrary to this scenario would be accompanied by a budgetary solution centered on recurring revenue and/or expenditure actions, preserving the city's strong fund balance position that serves as a hallmark of its 'AAA' rating.

MODERATE DEBT REPAID VERY RAPIDLY

Summit's debt burden is estimated by Fitch at a slightly high \$6,154 per capita but a low 1.98% of market value. The debt ratios are inclusive of a \$16.5 million note maturing in October issued to finance a combination of school and municipal improvement projects that will be repaid with proceeds from the issuance of long-term debt. The city is also considering the issuance of approximately \$10 million in bonds over the next 12-18 months to finance the construction of a parking structure to serve the city's commercial center.

Other reported capital needs over the next five years include \$10 million for a new fire headquarters and \$9.5 million for community facilities repair and maintenance. The city aggressively repays its outstanding debt at a rate of 86% in 10 years (or about \$48 million in principal) providing adequate capacity to meet future capital needs without materially increasing the debt burden. Municipal debt service charges in 2014 (excluding school debt) were budgeted at \$3.04 million or an affordable 8% of spending.

PENSION BENEFITS OFFERED THROUGH STATE PLAN

City pension costs are based on participation in the state operated retirement programs, the Police and Firemens' Retirement System (PFRS) and the Public Employees' Retirement System (PERS). The plans' reported June 30, 2013 funded ratios were 76.7% for PFRS and 74% for PERS (Fitch estimates the funded ratios at 69.8% and 67.3%, respectively, based on a lower 7% rate of return assumption). Unlike the state portion of PFRS and PERS, the aggregate contributions to the local portion of the plans have been equal to the actuarial required contribution. Summit's share toward PFRS and PERS for 2014 totaled \$2.7 million or 7.5% of spending. City OPEB liabilities are limited to very small annual stipends.