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MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF WESTBROOK'S (ME) $13.6 MILLION 2011 GENERAL OBLIGATION BONDS

01 Mar 2011

Aa3 RATING AFFECTS $67 MILLION IN PARITY BONDS OUTSTANDING

Municipality
ME

Moody's Rating

ISSUE

RATING

General Obligation Bonds, Series 2011

Aa3

  Sale Amount

$13,565,000

  Expected Sale Date

03/01/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Mar 1, 2011 -- Moody's Investors Service has assigned a Aa3 rating to the City of Westbrook's $13.6 million 2011 General Obligation Bonds. At this time, Moody's has also affirmed the Aa3 rating assigned to the city's $72 million in pre-refunding outstanding parity debt.

RATINGS RATTIONALE

Of the total $13.6 million new issue approximately $8.6 million represents municipal debt which is secured by the city's limited property tax pledge as debt service is subject to LD 1 levy limitations. The remaining bonds, are related to school construction costs, are secured by the city's unlimited property tax pledge. Approximately $8.3 million of the bonds will refund outstanding bonds, with no extension of maturity, for an expected net present value savings of 12.75% of refunded principal. The remaining portion will finance several infrastructure projects. The Aa3 rating reflects the city's satisfactory financial position, suburban Portland (G.O. rated Aa1) tax base with average wealth levels and an above average debt burden.

STRENGHTS

-Satisfactory fund balance reserves

-Recently diversified tax base with average income levels

CHALLENGES

-Limited tax base with moderate taxpayer concentration

-Above average debt burden

-Reported deficiencies with prior finance department and auditors

DETAILED CREDIT DISCUSSION

RECENTLY REPORTED DEFICIENCIES

The city's recently-appointed CFO determined that the city could not accept the draft fiscal 2009 audit due to material inaccuracies. Following this decision, the city hired a third party forensic accounting firm to investigate the financial operations and reporting of the prior administration and its auditor. The third party study reported numerous deficiencies, 19 of which were categorized as 'critical and severe'. The report also notes that prior inadequacies had already been corrected under the new CFO given the introduction of new policies and procedures. While the city hired a new auditing firm to complete the fiscal 2010 audit, there are no plans at this time to redo or amend the fiscal 2009 audit and therefore the fiscal 2010 completed audit has an adverse opinion, given the new auditor's inability to verify beginning fund balances. Moody's believes that the final balances presented in the fiscal 2010 audit are reliable. Future rating reviews will incorporate the city's ability to continue to implement and maintain policies, leading to certified audits.

IMPROVED FINANCIAL POSITION; CYCLICAL DECLINE POSSIBLE AS REVENUES SOFTEN

Moody's expects Westbrook's financial position to remain satisfactory due to management's conservative budgeting practices. The city may experience cyclical challenges over the near term, however, as local revenue growth slows and state aid reductions challenge school department operations. Over the past five fiscal years, Westbrook's General Fund balance increased to $10 million at year-end fiscal 2010, a satisfactory 27.8% of General Fund revenues and a significant improvement from $4.3 million (8.5% of revenues) in fiscal 2006. Moody's notes that as of fiscal 2010, the city's financial statements will report the school district's fiscal operations as a component unit, therefore significantly decreasing the city's reported revenues and expenditures. The undesignated portion has also increased, ending fiscal 2010 at 22.8% of revenues, up from a slim 5.8% in fiscal 2006. Adjusted fund balance as a percentage of both city and school district revenues decreases to a still healthy 18.22% in fiscal 2010, with 15% undesignated. Contributing to the positive results have been savings driven by enforced expenditure controls, a downsized workforce and consolidation across departments. Property taxes represent the city's largest revenue source (87.8% of General Fund revenues, 57.8% of city and school district revenues) and collections remain strong at over 97% annually. Additionally, the city has accumulated approximately $1.4 million of excess levy capacity by taxing below the allowable increase under LD1 in the past four fiscal years, providing additional financial flexibility.

The fiscal 2011 audit is relatively level to the prior year and includes an $80,000 appropriation of fund balance. Officials report that all line items are in line with budgeted amounts and project a modest increase to fund balance by year end due to expenditure savings. Looking ahead, the city's ability to effectively manage the current cyclical downturn and maintain satisfactory reserve levels will be important considerations in future rating reviews.

GROWTH IN LOCAL ECONOMY EXPECTED TO SOFTEN FOLLOWING PERIOD OF HEALTHY EXPANSION; TAX BASE REMAINS RELATIVELY CONCENTRATED

Moody's believes that growth for the city's $1.9 billion tax base, which borders the City of Portland, will remain slow over the near term, reflecting the slow economic recovery. The city's tax base has been relatively stagnant with full value increasing 3.4% annually, on average, over the past five years. Notably, new economic development initiatives have offset the impact of the downsizing of the city's former top taxpayer. The S.D. Warren paper mill, operated by Sappi (senior unsecured rated Ba3/Stable Outlook), accounted for approximately 40% of the tax base in 1997 and provided a large source of local employment. Over the last several years, Sappi has reduced staffing, reflecting the relocation of all mass paper production and equipment out of Westbrook. The company is expected to continue to produce specialty paper products in Westbrook going forward. Sappi's assessed value has declined significantly from $251 million in 1998 to $70 million in 2010, representing 3.7% of the tax base. The city continues to maintain a relatively high level of taxpayer concentration, with the top 10 taxpayers representing 21.7% of total value. The city's largest taxpayer, Westbrook Power, a natural gas power plant, makes up 7.5% of value. The plant is operated by the Calpine Corporation (Corporate Family Rating B1/Stable Outlook) and is expected to remain an important part of the local tax base going forward.

In an effort to diversify the local economy and augment tax base growth, the city has established ten tax increment financing districts, one of which houses Idexx Laboratories, the city's fourth largest taxpayer and largest employer, providing 1,000 jobs. Going forward, officials expect development of several industrial parks and the development of available land owned by Sappi to increase taxable values. The city's wealth and income indices approximate state averages and full value per capita is a healthy $115,410. Cumberland County's unemployment rate of 5.7% as of December 2010 remains well below state and national medians.

ABOVE AVERAGE DEBT BURDEN EXPECTED TO REMAIN MANAGEABLE

Moody's expects the city's above average direct debt position (3.9% of full value) to remain manageable in the near term given state support for school borrowing and the city's satisfactory rate of principal amortization (70.9% in ten years). When factoring overlapping obligations for Cumberland County and the Portland Water District (revenue rating of A1) the city's overall debt burden increases to 4.2%. Adjusting for anticipated state reimbursements for school construction (approximately 77% of eligible costs) the city's debt burden decreases to a more moderate 2.4%. Fiscal 2010 debt service accounts for an above average 13% of expenditures. Future debt plans include approximately $2 million for sewer upgrades within the next year. The city issues only fixed-rate debt and consequently has no outstanding variable rate debt or associated derivatives.

WHAT COULD MOVE THE RATING UP

-Continued growth and diversification of tax base

-Development of and adherence to formal fiscal policies

-Increase in fund balance

WHAT COULD MOVE THE RATING DOWN

-Decreases in fund balance reserves

-Declines in tax base

-Increased debt burden

KEY STATISTICS

2000 population: 16,142

Fiscal 2010 Equalized Valuation: $1.9 billion

Fiscal 2011 Equalized Value per capita: $115,410

1999 Per Capita Income: $19,501 (99.8% of the state, 90.3% of the nation)

1999 Median Family Income: $47,120 (104.3% of the state, 94.2% of the nation)

Adjusted overall debt burden: 2.4%

Amortization of principal (10 years): 70.9%

FY10 General Fund balance: $10 million (27.8% of General Fund revenues)

FY10 Operating Funds Balance (General Fund and School Department): $10 million (14% of total operating revenues)

Post-sale outstanding long-term general obligation debt: $72 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 and public 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

Lauren Von Bargen
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


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS Aa3 RATING TO THE CITY OF WESTBROOK'S (ME) $13.6 MILLION 2011 GENERAL OBLIGATION BONDS
No Related Data.
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