Fitch has removed the town's GO rating from Rating Watch Negative and assigned a Stable Rating Outlook.
The bonds are general obligations of the town secured by its full faith and credit and unlimited taxing authority.
KEY RATING DRIVERS
LOW INVESTMENT GRADE RATING: The low investment grade rating reflects the town's limited control over resources, as exemplified by a charter requirement for voter approval of annual budgets and the risk of budget overspending by the school department. These conditions could complicate the town's efforts to maintain budget stability and improve the exceptionally weak funding of its long-term liabilities.
STABLE OUTLOOK REFLECTS RECENT DEVELOPMENTS: Management was recently successful in achieving substantial employee and retiree concessions to rein in increasing long-term retiree costs. Voters approved the changes along with the town's fiscal 2015 budget last month.
LATE AUDIT SHOWS PROJECTED MODERATE RESERVE LEVELS: Final draft audited financials for fiscal 2013 reflect a decline in general fund balance to still-moderate levels. Projected surplus operations in the school fund are expected to eliminate an accumulated deficit balance in that fund.
FUTURE RETIREE COSTS CONTINUE TO GROW: Even with the labor concessions agreed to by employees Fitch expects continued budgetary strain and a very poorly funded pension plan for some time.
WEAK DEMOGRAPHICS: Demographics are weak with a relatively declining population, low wealth levels, and high unemployment. After a notable decline during the recession, assessed values have begun to stabilize.
LOW DEBT RATIOS: The town's overall debt levels are low with rapid amortization.
PRUDENT FINANCIAL MANAGEMENT: Management's ability to consistently maintain balanced operations and adequate reserve levels is key to the rating remaining at the investment grade level. These actions, combined with an increase in revenue flexibility driven by a strengthening economy and tax base growth could support a positive change in the rating.
BUDGET CONTROL LIMITATIONS: The rating incorporates Fitch's expectation for continued voter support of the city's recently adopted five year pension funding improvement plan that includes, among other things, minimal but systematic reduction in the city's long-term liabilities. Deviation from this expectation would likely result in negative rating action.
EMPLOYEE AND RETIREE PENSION AND OPEB REFORMS ACHIEVED
Management has successfully negotiated pension reform measures with its labor groups and retirees resulting in substantial budget relief for the next five years. Additionally, it has made broad changes to its health plans and negotiated higher employee and future retiree contributions. The sought after pension and health care reforms were part of the town's plan to reduce its long-term liabilities and achieve full funding of the annual required contribution (ARC) of its town-administered employee pension plan. The town plan is only 17% funded as of
The pension and OPEB changes were part of five-year employment contracts with its labor groups, effective
Retirees have agreed to suspension of COLAs for the next five fiscal years. These agreements are pending court approval which is anticipated prior to
Voters approved the fiscal 2015 budget via referendum last month, capping off a collaborative effort among all affected parties to restore financial stability within the town. The budget includes a 3.79% tax levy increase, slightly below the state-wide 4% annual levy cap. Property taxes make up 69% of the overall
The town's five year plan to improve pension funding assumes additional annual tax levy increases but these could be mitigated by an improving economy and tax base growth.
WEAK FINANCIAL REPORTING
The release of the town's audited financial results for fiscal 2013 has been delayed due primarily to the hiring of a new audit firm. Additionally, the town's finance department has experienced significant turnover the last three years exacerbating audit team efforts. Fitch has reviewed draft final results which show a general fund operating deficit after transfers of
The new auditing team did make some general fund adjustments including the reclassification of restricted fund balance (
The draft audit also shows positive school fund results with a
Management has indicated that the fiscal 2013 audit will have a modified opinion due to the auditor's inability to opine on the value of the town's capital assets due to outdated records. The town has hired an appraisal firm to value the assets and will report the results in the fiscal 2014 audit. The fiscal 2013 audit is expected to be released later this month.
FISCAL 2014 PROJECTIONS ON TARGET WITH BUDGET
Management reports that town and school fund results are tracking in accordance with or slightly better than budget. The town's voter-approved fiscal 2014 budget of
ELEVATED PENSION AND OPEB LIABILITIES
Years of underfunding of ARC payments have resulted in the funded ratio for the town-operated single employer municipal employees' pension plan to drop precipitously to 17% as of
The town's fiscal 2013 contribution to its pension plan was
As discussed above, the ARC for fiscal 2015 drops to
The town fully funds the ARC to the state's Employee Retirement System (ERS) for its teachers.
The town's unfunded OPEB liability as of
LOW DEBT RATIOS; MODERATELY HIGH CARRYING COSTS
Overall debt levels are very low at 1% of fiscal 2014 AV and
Total carrying costs for the full town pension plan ARC, ERS contributions, OPEB pay-go and debt service represents a moderately high 21.7% of projected fiscal 2013 governmental spending. Fitch expects carrying costs to decrease moderately due to the decline in the pension and OPEB ARCs beginning in fiscal 2015.
BELOW AVERAGE ECONOMIC INDICATORS
Wealth levels are slightly below state and national averages. Unemployment remains high at 10.1% in
The town was formerly an industrial and textile center and progress has been made in industrial diversification with several larger former textile mills converted to multiple tenancy by smaller, newer businesses. Management reports a notable increase in the number of building permits compared to last year reflecting both residential and commercial improvements and expansion. New development projects underway, and planned, are anticipated to increase assessed values and help offset some of the future anticipated tax increases. Fitch believes this to be reasonable due to the reports of activity underway and the increase in building permits.
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,
--'Tax-Supported Rating Criteria' (
--'U.S. Local Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Source: Fitch Ratings
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