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MOODY'S ASSIGNS A1 RATING TO THE CITY OF MIDDLETOWN'S (NY) $5.13 MILLION PUBLIC IMPROVEMENT (SERIAL) REFUNDING BONDS, 2011

08 Jun 2011

AFFIRMS A1 RATING ON $18.6 MILLION OF RATED OUTSTANDING PARITY DEBT

Middletown (City of) NY
Municipality
NY

Moody's Rating

ISSUE

RATING

Public Improvement Refunding (Serial) Bonds, 2011

A1

  Sale Amount

$5,130,000

  Expected Sale Date

06/09/11

  Rating Description

Long-term GO rating

 

Opinion

NEW YORK, Jun 8, 2011 -- Moody's Investors Service has assigned an A1 rating to the City of Middletown's (NY) $5.13 million Public Improvement (Serial) Refunding Bonds, 2011. Moody's has also affirmed the A1 rating on $18.6 million of the city's previously issued parity debt.

SUMMARY RATINGS RATIONALE

The bonds are secured by the city's general obligation, unlimited tax pledge and proceeds will be used to refund an equivalent amount of the city's Series 2001 bonds for an estimated net present value savings of 3% of refunded principal. The savings will be taken over the life of the issue with no extension of maturities. Factored into the A1 rating is the city's satisfactory financial operations with adequate reserves, which partly offset the city's reliance on economically sensitive sales and mortgage tax revenues; a moderately-sized tax base with below average wealth levels, and manageable debt burden.

STRENGTHS:

-Satisfactory financial flexibility with adequate reserve levels

-Limited state aid dependency

-Manageable debt burden

CHALLENGES:

-Mature tax base with limited developable land remaining

-Growing expenditure pressures related to contractual salaries and benefits

DETAILED CREDIT DISCUSSION

SATISFACTORY FINANCIAL OPERATIONS WITH ADEQUATE RESERVES

The city's financial position is likely to remain stable over the near-term given conservative budgeting practices and a demonstrated ability to generate balanced operations without the use of reserves. The city remains reliant on economically sensitive sales and mortgage taxes for 29% of its revenues, but Moody's believes a combination of cautious budgeting, tight operating expenditure controls and higher property tax revenues will help to balance out weaker performance in the former revenues going forward. After declining by more than $1 million per year in fiscal 2007 and 2008, General Fund balance has stabilized in the past two years, reaching an unaudited $4.7 million (an adequate 15.1% of revenues) at year-end fiscal 2010 (December 31), up slightly from $4.4 million in (14.8% of revenues) in fiscal 2009.

The city did not appropriate reserves as a revenue source in fiscal 2009 or 2010 and the city's General Fund balance rose slightly in 2009 (by $190,000) due to a mixture of revenue increases and expenditure cuts that included $550,000 in added revenue generated by a 5% property tax increase that balanced out a state aid reduction ($320,000) and underperforming sales tax receipts ($435,000), along with expenditure savings in public safety ($191,000), general government ($282,000), employee benefits ($358,000) and home and community services ($398,000). The expenditure cuts were achieved through an early retirement package that reduced police and firefighter head counts, a reduction in police overtime, the introduction of competitive bids of some services, and restructuring of the city's recycling operation to lower transportation costs. Unaudited financials indicate the city ran a somewhat larger ($360,000) operating surplus in fiscal 2010 driven in part by a 14% rise in the property tax that yielded $1.9 million in additional revenue, reduced overtime hours ($500,000 in savings) and interfund transfers netting $1.45 million to the General Fund. The city passed a balanced fiscal 2011 budget that did not include a reserve appropriation, and city officials project year-end General Fund balance will rise above current levels.

Property taxes are the city's primary source of revenue (47.6%), followed by sales tax (27.8%) and state aid (10.2%). Economically volatile mortgage tax receipts previously comprised another 4% of operating revenues, but have fallen to 1% of total revenues. The city collects taxes for the county and the school district, and tax collection rates have been strong at 98%. The city also guarantees the school district 100% of its tax levy and this obligation, when combined with city's reliance on sales tax and state aid revenues, leaves the city vulnerable to future economic downturns. The city's current satisfactory reserve levels mitigate this exposure, but rising employee benefit costs including a $1 million jump in the city's pension contribution for fiscal 2011, a $175,000 health insurance cost increase and contractual salary obligations will continue to place upward pressure on expenditures for the foreseeable future. If the city's revenue-raising capacity is unable to keep pace with these growing costs, reserves could be pressured, reducing the city's financial flexibility.

MATURE, RESIDENTIAL TAX BASE LIKELY TO EXPERIENCE SLOW GROWTH OVER THE MEDIUM TERM

Moody's expects that Middletown's moderately-sized $1.53 billion urban tax base will grow slowly over the medium term driven by new residential and commercial developments as well as by redevelopment of existing sites within the city. Full valuation declines are possible in the near term, however, as the city and region cope with the aftereffects of the recession and property market downturn. Located in north-central Orange County (GO rated Aaa), about 65 miles northwest of New York City (GO rated Aa2/stable outlook), the City of Middletown is predominantly residential (83% of assessed valuation). Most residents work within Orange County and neighboring Rockland County (GO rated A1/negative outlook); officials estimate that approximately 10% commute to New York City. Wealth and income levels are below average compared to the state, with per capita income and median family income at 81% and 92%, respectively. Full value per capita is above average at $59,061.

Full valuation growth averaged a strong 15% over the five years ending in 2008 driven largely by property value appreciation before declining 20% from 2009 through 2011 as market values absorbed the effects of the 2007-09 recession. By contrast, assessed value averaged a modest 1% growth per annum over the past decade and has remained generally stable in recent years. Management notes several residential and commercial developments being planned or already under construction, including a mixed-use complex with 192 rental units and 22,000 feet of commercial space, 42 condo units in a rehabbed factory site, the addition of 160 rental units to an existing apartment complex, a major expansion of the city's bus terminal to transform it into a regional hub for Coach bus lines and a $2.2 million renovation to an existing eight-story building in the downtown area. These projects could result in a higher growth rate for the city's assessed valuation in the medium-term as they are completed, although full valuation growth is expected to be slow over the near to medium term as local market values stabilize.

RISING, BUT MANGEABLE DEBT BURDEN

Moody's anticipates that the city's debt burden will remain manageable given average amortization, modest future borrowing plans and the subsidization of a portion of the city's debt with federal grants and low-interest loans provided by New York's state revolving fund. The city's direct debt is an above-average 3.6% of full value and expands to a still-larger 6.9% when the overlapping obligations of the school district and county are included. When adjusted for the school district's state building aid allocation, however, the city's debt burden decreases to a more manageable 5.5% of full value. Amortization of principal is below average with 50% retired within ten years. Near-term debt issuance plans are modest, with $3 million of bond anticipation notes likely in 2012 to fund further expansion of the city's water and sewer lines.

WHAT COULD CHANGE THE RATING - UP

-Substantial growth in the city's full valuation

-Further improvement in financial reserve levels

-Strong revenue and operating performance

WHAT COULD CHANGE THE RATING - DOWN

-Significant deterioration in taxable values or demographic profile

-Large, multi-year General Fund operating deficits leading to reserve declines

KEY STATISTICS

2010 population: 28,086

2011 Full valuation: $1.53 billion

Full value per capita: $59,061

Overall Debt burden (adjusted): 6.9% (5.5%)

Direct Debt Burden: 3.6%

Payout of principal (10 years): 49.8%

FY09 General Fund Balance: $4.4 million (14.8% of General Fund revenues)

FY10 General Fund balance: $4.7 million (15.1% of General Fund revenues)

Post-sale parity debt outstanding: $76.9 million

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009.

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, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation 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

Michael D'Arcy
Analyst
Public Finance Group
Moody's Investors Service

Robert Weber
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


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO THE CITY OF MIDDLETOWN'S (NY) $5.13 MILLION PUBLIC IMPROVEMENT (SERIAL) REFUNDING BONDS, 2011
No Related Data.
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