NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the city of Waterbury, Connecticut's approximately $320 million general obligation (GO) pension obligation bonds (POBs), series 2008. The bonds are expected to sell via negotiation on Mar. 28, with proceeds financing a portion of the city's unfunded pension obligation. In addition, Fitch affirms the rating on the city's approximately $80.5 million of outstanding GO bonds at 'BBB+' and the rating on the city's approximately $25.7 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 POBs, Waterbury reduces its unfunded pension liability but increases its debt levels. Overall net debt rises to a high $4,074 per capita or 5.8% of TMV from a below average $1,091 per capita and 1.6% of TMV. The city projects annual cash flow savings of between $4 million-$5 million on the combined pension ARC and debt service payments, 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.
POB proceeds will bring the system to roughly 70% funded from a mere 12.4% before this issuance. The city's OPEB liability totals $604.3 million, or a high 8% of TMV. Waterbury's increased debt levels combined with its substantial remaining employee benefit obligations are a credit concern that could limit upward movement in the rating, barring significant economic improvements.
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