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MOODY'S ASSIGNS A1 RATING TO FITCHBURG'S (MA) $4.8 MILLION G.O. BONDS AND MIG 1 TO $4 MILLION G.O. BANS; NEGATIVE OUTLOOK REMOVED

14 Jun 2011

A1 RATING APPLIES TO $39.6 MILLION IN OUTSTANDING G.O. DEBT; ENHANCED Aa2 PROGRAM RATING APPLIES TO $6.57 MILLION IN OUTSTANDING STATE QUALIFIED BONDS

Municipality
MA

Moody's Rating

ISSUE

RATING

General Obligation Municipal Purpose Loan of 2011 Bonds

A1

  Sale Amount

$4,875,000

  Expected Sale Date

06/15/11

  Rating Description

General Obligation

 

General Obligation Bond Anticipation Notes, 2011 Series B

MIG 1

  Sale Amount

$4,000,000

  Expected Sale Date

06/15/11

  Rating Description

Bond Anticipation Notes

 

Opinion

NEW YORK, Jun 14, 2011 -- Moody's Investors Service has assigned an A1 rating to the City of Fitchburg's (MA) $4.8 million General Obligation Municipal Purpose Loan of 2011 Bonds and a MIG 1 rating to Fitchburg's $4 million Series B General Obligation Bond Anticipation Notes (dated June 30, 2011 and payable June 29, 2012). Concurrently, the negative outlook has been removed and long-term A1 rating has been affirmed, affecting $39.6 million in outstanding long-term general obligation debt.

SUMMARY RATING RATIONALE

The underlying A1 rating reflects the city's improved financial position, sizeable tax base with below-average wealth characteristics, and moderate debt position. Removal of the negative outlook reflects stabilization in Fitchburg's financial position, including substantial growth in the stabilization fund. The bonds are secured by the city's general obligation pledge and are issued to finance various school and city capital projects. The notes are issued to provide short-term financing for school and city building remodeling projects.

STRENGTHS

-Sizeable tax base with institutional presence and redevelopment potential

-Improved and more conservative approach to budgeting and expenditure management

-Low debt burden with rapid principal amortization

CHALLENGES

-Weak demographic profile

-Slow tax base growth and lack of property tax levy capacity under Proposition 2 ½

-Continued reliance on appropriation of free cash to balance operating budgets

-High pension and OPEB liabilities

DETAILED CREDIT DISCUSSION

SATISFACTORY HISTORY OF MARKET ACCESS

Moody's expects Fitchburg to continue adequate access to capital markets, based on its recent history of unrated Revenue Anticipation Note (RAN) sales. The city received five bids on its most recent note sale, dated June 30, 2010. All bids were received from major regional and national financial institutions. Based on this history Moody's anticipates that Fitchburg will be able to refund the notes, if necessary, at their June 2012 maturity.

CERTAIN BONDS ENHANCED BY MASSACHUSETTS QUALIFIED BOND PROGRAM

The enhanced Aa2 rating and stable outlook, assigned to $6.57 million of Fitchburg's long-term debt, reflect the credit enhancement provided by the Commonwealth of Massachusetts' Qualified Bond Program. The program is a direct-payment system whereby the Commissioner of Revenue authorizes the State Treasurer to deduct from the city's quarterly state aid payments an amount sufficient to meet the city's debt service on qualified securities. In fiscal 2011, Fitchburg received aid from the commonwealth totaling more than 64 times the maximum annual debt service for this issue. The State Treasurer makes debt service payments directly to a state-approved paying agent on behalf of the city. Moody's believes that the commonwealth's strong commitment to state aid for municipalities and the program's sound payment mechanisms, which do not rely on the trigger of a notice of potential default, enhance the likelihood of full and timely debt service payment. The programmatic rating is linked to the commonwealth's general obligation rating of Aa1 with a stable outlook.

IMPROVED FINANCIAL POSITION WITH GROWING RESERVES

The city's financial position has improved considerably. Transfers to the stabilization fund, enabled by budget restructuring and aggressive expenditure management, have boosted available reserves to $7.35 million (6.8% of general fund revenues) in fiscal 2010, a significant improvement from the $1.1 million (1% of revenues) in fiscal 2007 available reserves. However, reserves are still relatively slim: the commonwealth median available reserve, which is well below the national median, approximates 10% of General Fund revenues. The city's financial operations have stabilized and its reserve position has improved significantly, however the city faces significant challenges in restoring structural balance in an environment of uncertain state aid and regional economic pressure.

Operations in fiscal 2011 remain strained under the pressure of $5.5 million in state aid cuts (cumulative) since fiscal 2008 and limited property tax revenue raising capacity under Proposition 2 ½. Projections for the June 30 fiscal year-end indicate an additional transfer of $1 million from the general fund to the city's stabilization fund, bringing the total to just over $3 million, however available reserves (unreserved general fund plus stabilization) are expected to dip by approximately $500,000. Unreserved general fund balance is projected to drop by roughly $1.5 million, including the transfer to stabilization, after funding several one-time capital purchases and a legal settlement. Enterprise fund operations are expected to be positive, with water and sewer revenues on target and expenditures lower than budget.

Favorably, the city has reduced its reliance on free cash appropriations to balance operating budgets. The adopted fiscal 2012 budget includes a 1.6% expenditure increase and a $1.2 million increase in state aid for education, which offsets the loss of federal stimulus funding received in fiscal 2009-2011. The city has included a free cash appropriation of $850,000 for operations, which although reduced from prior years could still pressure available reserves if not fully replenished. Another $1 million transfer to stabilization is expected in fiscal 2011.

After unfavorable investment performance similar to that experienced in most systems, the city's pension system funding dropped slightly to 47% as of a January 1, 2010 valuation. The city has extended its funding schedule for the $93 million unfunded accrued actuarial liability (UAAL) to 2030, somewhat reducing pressure on future operating budgets. Fitchburg continues to budget its full annually required contribution (ARC) as required by the commonwealth. The city's liability for other post employment benefits has been identified at $187 million, with an ARC of $13 million. Fitchburg plans to continue to fund only the pay-as-you-go portion of the liability, which was roughly $5.7 million in fiscal 2010.

MODERATELY-SIZED TAX BASE WITH REDEVELOPMENT POTENTIAL

Fitchburg's $2.6 billion tax base is likely to experience additional declines in assessed valuation, along with most cities in the region, as the real estate markets continue to adjust after the recession. The city projects a 4% decline for fiscal 2012, based on valuations as of January 1, 2011. Overall the tax base has dropped 21% from the $2.8 billion peak in fiscal 2008. The city has adjusted its tax rate to compensate for the loss in value and maintain property tax levy growth at the maximum 2.5% as allowed by the commonwealth's Proposition 2 ½ property tax levy limit. New development also fell during the recession with only $398,000 in new growth recorded in fiscal 2010, down from the $1.1 million peak in fiscal 2007. Indicating modest revitalization in the tax base, new growth increased to $543,000 in fiscal 2011 and is conservatively projected at $400,000 for fiscal 2012. Building permit activity is up 35% year-to-date from fiscal 2010, reflecting new residential and commercial redevelopment activity in the city's tax base, which was primarily residential at 80% in fiscal 2011.

The city is a residential and industrial community located approximately 46 miles west of Boston (G.O. rated Aaa/stable outlook) and 25 miles north of Worcester (G.O. rated A1). Unemployment remains high in the city, with a April 2011 rate of 12%, significantly higher than the national unemployment rate of 9.2% during the same time. Resident income levels continue to trail those of the state. Similarly, the equalized value per capita of $66,174 is just 41% of the state median and 74% of the national median.

AFFORDABLE DEBT BURDEN WITH CAPACITY FOR FUTURE PROJECTS

Fitchburg's debt position is expected to remain affordable given the lack of significant near-term borrowing needs. The city's direct burden is moderate at 1.5% but when adjusted for commonwealth school building aid falls to a more moderate 1% of equalized value, and principal amortization is average with 82.4% retired within 10 years. The city plans to budget $5 million in pay-as-you-go capital, maintaining budgetary capacity for future school and city projects. The city is considering a significant bond issue for school and city hall renovations in 2017, although initial estimates are not yet available. The city expects to qualify for up to 80% in grant assistance for school construction from the Massachusetts School Building Authority. Fitchburg has no exposure to variable or auction rate debt or swap agreements.

WHAT COULD MAKE THE RATING GO UP

*Significant sustained increase in available reserves

*Reduced reliance on free cash appropriations for operations

WHAT COULD MAKE THE RATING GO DOWN

*Decrease in available reserves

*Widening deficits in internal service or enterprise funds

*Increasing reliance on free cash appropriations

* Significant increase in debt burden

KEY STATISTICS:

2010 Population: 40,239 (+2.9% since 2000)

2011 Equalized Value: $2.6 billion

2011 Equalized Value Per Capita: $66,174

2000 Census Per Capita Income: $17,256 (66.5% of MA, 80% of U.S.)

2000 Median Family Income: $43,291 (70% of MA, 87% of U.S.)

2010 Total General Fund Balance: $9.15 million (8.4% of General Fund Revenues)

2010 Available Reserves: $7.3 million (6.8% of General Fund revenues)

Direct Debt Burden: 1.5%

Adjusted Debt Burden: 1%

Principal Amortization (10 years): 82.4%

Post-Sale Long-term General Obligation Debt Outstanding: $39.6 million

The principal methodologies used in this rating were General Obligation Bonds Issued by U.S. Local Governments published in October 2009, and Bond Anticipation Notes and Other Short-Term Capital Financings published in May 2007.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Susan Kendall
Analyst
Public Finance Group
Moody's Investors Service

Conor McEachern
Backup Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S ASSIGNS A1 RATING TO FITCHBURG'S (MA) $4.8 MILLION G.O. BONDS AND MIG 1 TO $4 MILLION G.O. BANS; NEGATIVE OUTLOOK REMOVED
No Related Data.
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