Fitch Rates Cheshire, CT's GO Bonds 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings takes the following rating action on the Town of Cheshire, CT's (the town) general obligation (GO) bonds:

--$10,500,000 GO bonds, 2013 at 'AAA'.

The bonds are scheduled to sell competitively on Feb. 13. Proceeds will be used to support, sewer, general purpose and school projects.

In addition, Fitch affirms the following ratings:

--$51 million outstanding GO bonds at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the town's full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: The town's strong financial management has made prudent and conservative budget decisions contributing to consistently solid reserve levels.

ABOVE-AVERAGE SOCIOECONOMIC INDICATORS: Sound economic indicators include high income levels, low unemployment rates, very strong tax collection rates and a strong school system.

LOW TO MODERATE DEBT RATIOS: Debt levels are low with above-average amortization rates but may become more moderate with future anticipated debt.

INCREASED PENSION LIABILITIES: Annual contribution levels have dropped to below 100% of the ARC for pensions as annual liabilities have increased and funded levels have declined. Overall liabilities remain manageable due to the town's high degree of financial flexibility.

RATING SENSITIVITIES

A substantial decline in financial flexibility due to lower reserve levels inconsistent with the rating category could result in a downward rating change.

CREDIT PROFILE

Cheshire is a residential suburban community with a population of 29,261 and is located 14 miles outside of New Haven and 25 miles south of Hartford.

SOUND ECONOMIC UNDERPINNINGS

The town has historically had very high wealth levels with 2011 median household income equal to 158% and 208% of state and national levels, respectively. The town's unemployment rate was 6.6% as of November 2012 and continues to rank lower than the state's rate of 8.3% for the same period.

Management indicates there is significant expansion of existing properties along with some new development of unused property. Certain projects that were postponed due the economic downturn have reportedly been resurrected with the potential to expand the town's taxable assessed value (TAV). The top 10 taxpayers comprise a low 6.3% of TAV and consist of a mix of industrial, retail and manufacturing companies.

STRONG FINANCIAL PERFORMANCE

Financial performance is sound, characterized by ongoing general fund revenue growth, expenditure controls and ample flexibility. Steady growth in TAV along with moderate mill rate increases have resulted in consecutive years of property tax levy increases. Property taxes make up the majority of general fund revenues (74% in fiscal 2012). Employee-related expenses and school department costs continue to dominate the town's budget.

General fund results for fiscal 2012 show a deficit, after transfers, of $748,430 (0.7% of spending) on a GAAP basis. The drawdown was used primarily for non-recurring purposes, including pay-as-you-go capital and to cover a deficit in the town pool fund related to storm damage. The unrestricted general fund balance remained a still solid 10.6% of spending. The town's unassigned general fund balance increased to $8.9 million from $8.1 million and at 9.3% of budgetary expenses, remained above the town's budgetary fund balance policy of 8%-9%.

Further financial flexibility is derived from $4.6 million currently held in the debt service reserve fund, earmarked to help smooth out future debt service costs beginning in 2017 connected to future planned borrowing for water treatment plant upgrades.

The town's fiscal 2013 budget of $98.7 million is up 1.02% from fiscal 2012 and includes a mill rate increase of 1.42%. The budget remains conservative and includes a carryover of $600,000 in unused fund balance from fiscal 2012. Increases in education, medical, salary, and pension costs are drivers for the increase in the budget.

The town has historically included in its budget transfers for maintenance and small capital projects to reduce borrowing needs, and these total $1.1 million for 2013. Management has indicated that expenses fiscal year-to-date are in line with expectations and revenues are up slightly due to strong tax collections exceeding its budgeted 99% collection rate.

LOW DEBT RATIOS EXPECTED TO INCREASE WITH PROPOSED FUTURE DEBT

Debt ratios are low to moderate with debt per capita at $2,036 and debt to market value at 1.5%, net of state school construction grants and water/sewer assessments. GO debt is amortized very quickly with 76% of principal amortized in 10 years. Annual debt service costs have been declining and for fiscal 2013 represent a manageable 8.4% of the total budget.

The town's capital needs are varied with the bulk of the needs pertaining to water and sewer infrastructure improvements and education. Debt levels are expected to rise moderately with potential debt issuances over the next three years totaling $30 to $35 million for town and school improvements and various other capital needs. This does not include a potential net borrowing of $25 million for an upgrade to its water treatment plant approved by residents in a November referendum. Borrowing for this project is not expected to occur until fiscal 2016 or 2017 and will be funded through the state's Clean Water Fund program and supported partially with user assessments. The current rapid debt amortization rate along with available debt reserve funds help mitigate the potential increase in the town's debt burden.

GROWING PENSION LIABILITIES; REDUCTION IN CONTRIBUTIONS

The town has historically funded its annual required contribution (ARC) for pensions at 100%. Beginning in fiscal 2012, however, the town funded $1.5 million (72%) of its $2.1 million ARC, which was a $1 million increase from the fiscal 2011 ARC. The increase in the ARC was a result of large investment losses in 2008. Management has budgeted $2 million (76%) towards its $2.6 million ARC for fiscal 2013.

Management expects to continue to gradually increase its annual contribution over the next five to six years until ultimately meeting 100% of the ARC. Additionally, it has closed its pension plans to most new hires which could help alleviate future pension costs. Fitch does not view favorably the funding of annual pension contributions at less than 100% and in affirming the rating assumes the town will meet their goal of resuming funding of the ARC.

The town's aggregate funded ratio for its town, police and volunteer firefighter pension plans was 90.3% as of July 1, 2010 or an average 79% funded using Fitch's more conservative 7% rate of return. The combined unfunded pension liability for the three plans was a manageable $6.75 million.

OPEB LIABILITIES ARE MANAGEABLE

The town's ARC for other post-employment benefits (OPEB) of combined school, police and town employees was $2.5 million in fiscal 2012 and the town made pay-as-you-go contributions of $1.65 million. The OPEB unfunded liability as of July 1, 2011 was a manageable $26 million, $17.9 million of which represents an implicit rate subsidy incurred by the town for retired teachers' participation in its health plan. OPEB trusts have been funded with $1.3 million in assets as of July 1, 2012.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.

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:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

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