Fitch Rates Milford, CT's Issue of 2015 GOs 'AA+' and BANs 'F1+'; Outlook Stable
--$8.4 million GO bonds, issue of 2015, 'AA+';
--$13.4 million GO BANs, Lot A, 'F1+';
--$2.6 million GO BANs, Lot B, 'F1+'.
The bonds and notes are scheduled to sell competitively on Oct. 28th. The proceeds of the bonds will be used to finance outstanding BANs and provide funding for various public improvement, school and sewer projects. The BANs are being issued to fund city, school and sewer projects.
In addition, Fitch affirms the city's following ratings:
--$91.7 million outstanding GO bonds, at 'AA+';
--$1.8 million outstanding BANs at 'F1+'.
The Rating Outlook is Stable.
The bonds and notes are general obligations of the city, backed by the city's full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
GOOD SOCIOECONOMIC PROFILE: The city benefits from a stable economy with above-average real estate valuations, high wealth levels, and a relatively diverse tax base.
SOUND FINANCIAL MANAGEMENT: Management's conservative budgeting practices, moderate property tax increases and prudent debt policies have contributed to the maintenance of solid reserve levels and financial stability.
MODERATE DEBT LEVELS: Milford's debt burden is moderate and its long-term obligation profile benefits from above-average amortization and manageable borrowing plans.
WELL-FUNDED RETIREE COSTS: Pensions are well funded and other post-employment benefit (OPEB) liabilities, while moderate, are well managed and are not expected to overly burden the credit.
NOTE RATING LINKED TO GOs: The 'F1+' rating on the BANs corresponds to the city's strong long-term credit characteristics and history of successful market access.
HEALTHY RESERVES: Fitch expects the city's sound financial position to remain stable over the next several years. The rating would be sensitive to any material weakening of the city's financial reserves.
The city of Milford is located in New Haven County between New Haven and Bridgeport. The city has 17 miles of shorefront property along the Long Island Sound and a 2014 population of 53,358.
ABOVE-AVERAGE SOCIOECONOMIC PROFILE
Residents benefit from easy access to the employment market in southern Fairfield County. Residents are affluent, with median household incomes greater than 150% of the national average and 116% of the state's high average. Market value per capita is high at $171,000 based on the city's fiscal 2016 estimated market value of $9.1 billion. The city's August 2015 unemployment rate continued to improve over recent year gains to a low 4.9% (down from 5.9% the year prior), better than the state and the nation.
Milford is primarily residential with some commercial and industrial presence represented by retail shopping centers and two power plants. Top employers include the city's Board of Education (BOE) with 1,324 workers, Subway world headquarters (1,000), Milford Hospital (700), and the City of Milford (539).
The top 10 taxpayers represent a moderate 8.4% of taxable value. The two power plants, Milford Power and GenConn Energy, have entered into separate long-term payment in lieu of tax (PILOT) agreements with the city and their valuations are not included in the city's taxable assessed value (AV). The city and Milford Power recently agreed to a new 10-year PILOT agreement that includes increased annual PILOT payments of $4.7 million (up from $3.5 million in the previous agreement).
SOUND FINANCIAL PROFILE
The city's financial position continues to be sound. For fiscal 2014 the city realized larger than budgeted property tax collections; expenditures were below budget due to a mid-year hiring freeze and other spending restrictions. Property taxes, excluding PILOT payments, represented a high 81% of fiscal 2014 general fund revenues. Property taxes are not limited with respect to rate or levy, providing the city with strong revenue raising capacity. Milford's rates remains low compared to peers in the region at under $28 per $1,000 AV.
Fiscal 2014 operating results after transfers included a deficit of $1 million (less than 1% of spending), resulting in an unrestricted fund balance of $22.8 million or a solid 11.1% of spending. The fiscal 2014 unassigned fund balance totaled $14.8 million or 7.3% of revenues, which is in line with management's informal goal of a minimum of 5% and target of 7%-8%.
The fiscal 2015 budget featured the city's typical practice of using a portion of reserves to balance the budget. It included a $4 million use of fund balance and a 3.6% mill rate increase to 27.22. Management reports it will not reduce fund balance as originally planned, as operating revenues exceeded expectations by approximately $1.8 million and expenses were less than budgeted. In fact, unrestricted fund balance is projected to increase $4.3 million to $27.2 million, or 13.9% of spending.
FISCAL 2016 BUDGET UP MODESTLY
The fiscal 2016 budget totals $202 million, an increase of 1.9% over the fiscal 2015 budget. The increase in expenditures was primarily related to debt service, employee benefits and education costs. The budget also includes the use of $3.5 million in fund balance. Fitch expects that management will continue to maintain solid reserve levels through its conservative budget practices and prudent monitoring of expenditures throughout the year.
MODERATE DEBT BURDEN
Debt ratios are moderate with overall net debt of $172.4 million equal to $3,232 per capita and 1.9% of market value. The five-year capital improvement plan includes approximately $140 million in borrowing, much of which is for school projects and sewer improvements. Fitch believes that the city's debt burden will increase but remain manageable due to its above-average amortization rate of 63% retiring in 10 years and the informal policy to limit debt service to 10% of general fund spending (the city budgeted 7.2% in fiscal 2016).
PENSION ASSUMPTIONS MORE CONSERVATIVE; ARC INCREASING
The city operates a single-employer pension plan which covers Milford's full-time employees with the exception of teachers, who are covered by the state's plan. The state is responsible for costs related to teacher pensions. The city plan was funded at an estimated high 91% using Fitch's 7% investment rate of return (IRR), based on the plan's July 1, 2014 valuation. Using Fitch's calculations the plan's unfunded actuarial accrued liability (UAAL) was $35.8 million, which is less than 0.1% of market value.
The city contribution in fiscal 2015 and the amount budgeted for fiscal 2016 are less than the actuarially required contributions (ARC). The ARC has increased substantially since fiscal 2013, primarily due to changes in plan assumptions (including the lowering of the IRR to 7.75% from 8.25%) and the inclusion of fire and police overtime costs. Also, fiscal year 2015 represented the final year of a five year-smoothing of investment losses incurred in 2008 and 2009.
In fiscal 2015, the city implemented a new informal pension contribution policy in response to the increasing ARC. The new policy stipulates the city shall contribute the full ARC unless the amount varies by more than 15% from the previous year, in which case the city will contribute a minimum of 115% of the previous contribution with a goal of ultimately bringing funding back to 100% of the ARC.
Fitch views funding of the actuarial based pension contribution as a fixed cost on the budget, and considers failure to fully fund the actuarial amount a form of deficit financing. However, the strong position of the pension fund combined with the town's history of sound financial management and strong revenue raising capacity mitigates any long-term rating concern.
OTHER RETIREE COSTS WELL-MANAGED
The UAAL for other post-employment benefits (OPEB) is $269 million or an elevated 3% of market value based on the July 1, 2014 valuation. Management expects the liability to decline in the future as a result of recently negotiated program changes, including premium sharing increases with certain worker groups. Management has established a trust for the city's portion of OPEB and has made transfers of $0.5 million to the trust each of the last six years. Trust assets totaled $4.9 million at Aug. 31, 2015, as reported by management.
Total carrying costs for fiscal 2014 debt service, pension ARC, and OPEB pay-as-you-go costs were a low 9.9% of total fiscal 2014 governmental spending. Fitch expects carrying costs to increase slightly due to growing pension costs but they should remain manageable.