NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the city of Waterbury, Connecticut's approximately $320 million taxable general obligation (GO) pension bonds, series 2008. The bonds are expected to sell via negotiation on July 8, with proceeds financing a portion of the city's unfunded pension obligation. Fitch previously issued a rating for these bonds on May 20, but withdrew it on June 2 after the city delayed the sale due to market conditions. The city has since met their savings threshold and decided to issue the bonds.In addition, Fitch affirms the rating on the city's approximately $75.5 million of outstanding GO bonds at 'BBB+' and the rating on the city's approximately $20.5 million of GO state capital reserve fund (SCRF) bonds at 'AA-'. The SCRF bonds carry a state debt service reserve replenishment mechanism that has been appropriated by the state and does not require further legislative approval. The Rating Outlook on all bonds is Stable.
The 'BBB+' rating reflects Waterbury's stabilized financial position following considerable operating deficits in the early part of the decade that resulted in negative general fund balances. The rating also considers the city's diversifying economy, which is somewhat offset by a high unemployment rate and slipping income levels relative to the state and nation. Debt levels, having been moderately low, increase to above-average levels with this issuance, and remaining employee benefit obligations are substantial relative to the city's tax base. The rating further reflects the city's strong tax-intercept program and the ability of the Waterbury Financial Planning and Assistance Board to be reinstituted if the city does not adhere to strict financial benchmarks.
With this issuance of pension bonds, Waterbury reduces its unfunded pension liability but increases its debt levels. Overall net debt rises to a high $3,975 per capita or 5.7% of taxable market value (TMV) from a below-average $991 per capita and 1.4% of TMV. The city projects total cash flow savings of at least $75 million on the combined pension annual required contributions (ARC) and debt service payments over the life of the bonds, assuming an 8.5% investment rate of return. However, Fitch notes that underperforming pension assets could lead to increased ARC payments, which might dilute or reverse projected cash flow savings and add budgetary pressure. All of the city's outstanding GO bonds are secured by a tax revenue intercept that provides for a first lien on city property tax revenues held by the trustee.
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