Fitch, the New York-based global rating agency, affirmed last week the city’s general obligation bonds at an A rating, but also issued a warning: “annual pension and internal service fund obligations continue to be underfunded which if not addressed, could lead to a rating downgrade.” Municipal bond ratings are critical in determining the amount of investment risk and interest cost on bonds used for financing government projects. From Fitch:
Fitch Ratings assigns an ‘A’ rating the following City of Bridgeport, CT (the city) general obligation (GO) bonds:
–$17.1 million GO refunding bonds, 2013 series A
Bond proceeds will be used to advance refund the series 2003C and 2004A bonds outstanding for debt service savings. The bonds are expected to be sold on a negotiated basis on June 26, 2013.
In addition, Fitch affirms the following:
–Approximately $544 million outstanding GO bonds, issued prior to 2008 at ‘A’
The Rating Outlook is revised to Negative from Stable.
The bonds are general obligations of the city and backed by its full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
WEAK BUDGETARY BALANCE: While the city has successfully negotiated with its labor unions, reduced some general spending and tempered future employee benefit costs, annual pension and internal service fund obligations continue to be underfunded which if not addressed, could lead to a rating downgrade.
HEAVY DEPENDENCE ON STATE AID: The city budget relies heavily on state funding for education and payments in lieu of taxes on tax-exempt properties. State funding was as budgeted for 2013 and the outlook for 2014 is stable.
LOW RESERVES: Overall reserves remain low, necessitate continued reliance on short-term borrowing for liquidity and will be pressured as the city addresses pension, OPEB and internal service fund obligations.
ABOVE AVERAGE DEBT: Debt ratios are slightly above average and pension and OPEB liabilities are high resulting in a high and increasing fixed cost burden limiting overall financial flexibility.
WEAK ECONOMIC INDICATORS: Economic indicators remain weak with high unemployment and below average wealth levels. City population has been increasing the past decade reversing a declining trend.
FLAT TAX BASE: Following revaluation in 2009, city assessed valuations (AV) have been flat indicative of minimal new development activity and could face downward pressure from the 2014 revaluation.
FINANCIAL CHALLENGES: The Negative Rating Outlook reflects the city’s continuing fiscal challenges and limited flexibility. Future rating/outlook actions will be dependent upon the city’s ability to improve budgetary balance, strengthen reserve levels and address its long term pension and internal service fund obligations in the near term.
Bridgeport is Connecticut’s largest city, with a population of approx. 145,638 in 2012. It is located 63 miles north of New York City and abuts the Towns of Fairfield, Trumbull and Stratford, CT.
WEAK ECONOMY; STABLE TAX BASE
The city has a diverse economic base with the largest employers in health care, higher education, manufacturing and financial services. However, historically high unemployment rates (averaged over 12% the past four years and was 12% in April 2013) and below average wealth levels underscore weakness in the local economy.
AV has been flat over the past five years with leading tax payers somewhat concentrated in utility companies. Several small new and redevelopment projects coupled with on-going school facility improvements are expected to help improve the city economy and tax base but AV faces downward pressure from revaluation in 2014.
WEAK BUDGETARY BALANCE, LOW RESERVES
Following three successive small general fund surpluses, fiscal 2012 ended in a small $3.8M (0.73% of budget) deficit largely due to state mandated post adopted budgeted items related to pension payments and school funding. Unreserved general fund balance has historically been low and closed fiscal 2012 at $12.3 million or 2.3% of budget. If not for the unbudgeted items, fiscal 2012 would have ended with a small $185,000 surplus. Budgetary performance has been aided by continued underfunding of pension and health-benefit obligations. Fitch views continued underfunding as a weakness.
Fiscal 2013 budget reflected continuation of conservative revenue forecasting with minimal expenditure increases except for an increase in education to match additional state funds for reforms and improvements. Recent storm costs have been cash funded within the budget using some reimbursement from prior year storms and are expected to be nearly fully reimbursed over time. The city is forecasting balanced general fund performance for fiscal 2013. Based on year to date cash flows, the expectation appears reasonable.
The adopted budget for 2014 includes a small millage increase and used conservative state funding amounts. Based on the subsequently adopted state budget, the city’s 2014 budget is expected to be balanced without the use of any one-time items or reserves.
The city maintains an internal service fund to account for its self-insured health benefits which includes an actuarial estimate of liability for present and future workers compensation claims. The fund continues to have a sizable deficit, approximately $94 million at June 30, 2012 (17% of GF budget and 1% of 2013 MV), which the city expects to amortize over a 3 – 5 year period. The deficit was reduced by $8.5M in fiscal 2012. Amortizing the current deficit balance will be challenging given the city’s limited financial flexibility.
Over the past four years the city has maintained weak budgetary balance due to the city’s pro-active efforts in collecting taxes, modest millage rate increases, a freeze on certain expenditure items, employee layoffs and a hiring freeze. The budget has also relied on annual pension funding below 100% of the actuarial required contribution and a continuing internal service fund deficit related to medical self-insurance costs. Overall pension funding for 2012 was approximately 82% of ARC (underfunded by approximately $3.6 million or 1% of general fund spending). Fitch expects continued budgetary challenge and likely low reserves as the city addresses long term pension and internal service fund obligations.
General fund revenues are led by property taxes (50%)and heavily reliant on state aid (40%)funding. City property tax collection rates have improved with the institution of regular tax lien sales and the 2014 outlook for state funding is stable.
Leading city expenditures are for education and personnel costs. Approximately 75% of the city school budget is funded by the state. The city has reduced its workforce by 200 (15%) since 2007 and continues to selectively eliminate positions and balance service needs. Spending reductions are a result of smaller department budgets, the reining in of police overtime and the achievement of union concessions. Concessions granted by bargaining units included mandatory 25% healthcare contributions from all employees, excluding teachers, by July 1, 2012. Additionally the fire fighters’ pension plan that was operated by the city was converted to the state-operated Municipal Employees’ Retirement Fund (MERF) in fiscal 2012 resulting in additional contribution savings for the city. These concessions resulted in approximately $3 million in expenditure savings to the city in fiscal 2012 and 2013.
HIGH DEBT; LIQUIDITY NEEDS
Overall debt ratios are above average with debt to market value at 6.4% and debt per capita at $4,515, including the city’s pension obligation bonds. Future debt needs are moderate and include street, park and building projects. No new bonds are expected to be issued in the near term. Amortization is average with 61% retired in 10 years.
Since 2006, the city has issued approx. $100 million annual total tax anticipation notes (TANs) to supplement cash flow needs. A $25 million TAN was issued in April 2013 and the city anticipates an additional issuance of $70 million in TANs this fall. Annual debt service for fiscal 2012, inclusive of debt service for pension obligation bonds, was slightly above average at 12.4% of general fund spending.
SIGNIFICANT RETIREE OBLIGATIONS
The city administers four defined benefit pension plans for public safety, janitors and engineer employees. Other employees are covered under the state-operated MERF and the State Teachers’ Retirement System. In August 2000, the city issued $350 million in pension obligation bonds to finance 79% of its then unfunded liability under its public safety Plan A, closed to new enrollees since Jan. 1984. The bonds were issued pursuant to state statutes and the city is required to make its actuarially recommended contribution and maintain the 79% funded ratio that was borrowed for. Due to the recent economic downturn, special legislation was passed by the Connecticut General Assembly in 2009 that permitted the city to limit its pension contribution for its Plan A to $6 million for fiscal 2009, well below the annual required contribution (ARC) of $9.6 million. For fiscal 2010 the city contributed $4.7 million (38% of its ARC) and $4.6 million in 2011, which was greater than the $4 million allowed minimum contribution pursuant to the state waiver legislation but still well below the ARC.
For fiscal 2012 the city obtained a continued state waiver from the full actuarially required contribution and the state approved a 24-year level 5% amortization of the unfunded liability. Annual contributions for 2012 equal $7 million (71.5% of ARC and 2% of general fund budget) and increase to $10.5 million and $11.6 million in fiscal 2013 and 2014 respectively, likely closer to the annual ARC. The unfunded liability for the Plan A pension plan was $189 million at July 1, 2012 and the plan was only 44% funded, assuming an 8% investment rate of return. Using Fitch’s more conservative 7% discount rate, this amount decreases to a low 39%.
The funding condition of the other city plans has been slightly better. In fiscal 2012, the city contributed 87% and 69% of its ARC to the city-operated police and fire pension plans, respectively, totaling a combined $10.6 million. As of July 1, 2011 the city operated police and fire plans were 73% and 70% funded (Fitch-adjusted), respectively. For MERF, the city contributed $9.6 million, equal to the required contribution. The city makes pay-go payments for its janitor and engineer plan and paid $914,418 in fiscal 2012.
The total amount of these annual pension contributions combined with Plan A contributions and annual debt service costs equals a high fixed cost burden of 21.4% of total net governmental general fund spending. This burden will escalate with increased pension funding requirements for the city’s Plan A pursuant to the state enacted legislation governing such contributions for the city. Offsetting these increased costs somewhat is a descending debt service schedule and moderate capital needs.
The city funds it OPEB costs on a pay-go basis. As of July 1, 2010, the latest available calculation date, the city unfunded OPEB liability was a very high $915.8 million, or 8.9% of market value. The city is currently having a full updated actuarial analysis done on its OPEB obligations this year and with the new labor concessions in place that require higher healthcare contributions from its employees, OPEB liabilities are expected to be lower but remain above average.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index and IHS Global Insight.
Applicable Criteria and Related Research:
–‘Tax-Supported Rating Criteria’ (Aug. 14, 2012);
–‘U.S. Local Government Tax-Supported Rating Criteria’ (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria