Fitch : Rates Nashua, NH's Series 2016 GO Bonds 'AAA'; Outlook Stable

28 Jan 2016 2:21 PM EST

Fitch Ratings-New York-28 January 2016: Fitch Ratings has assigned an 'AAA' rating to the following City of Nashua, NH's (the city) general obligation (GO) bonds:

--$15,900,000 GO bonds, series 2016.

The bonds are scheduled to sell competitively on Feb. 2nd. Proceeds will be used to finance a variety of capital improvements within the city.

In addition, Fitch affirms its 'AAA' rating on the city's following GO bonds:

--Approximately $66 million outstanding series 2010, 2011, 2013, 2014 and 2015 GO bonds;
--$140.6 million outstanding, GO Pennichuck Corporation acquisition bonds (taxable);
--$17.2 million outstanding, GO refunding bonds, series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are unlimited tax general obligations of the city.

KEY RATING DRIVERS

STRONG FINANCIAL MANAGEMENT: The city's management team continues to successfully manage operating expenditures, raise revenues as appropriate, and maintain strong fund balances in the context of voter-approved spending limitations.

DIVERSE AND EXPANDING ECONOMIC BASE: The city's economy continues to see growth and development and is a key center in the state for business and government. Unemployment rates have declined to low levels and wealth indicators are strong.

AFFORDABLE DEBT LEVELS: The city's overall net debt burden is low and overall carrying costs are manageable. Amortization of general fund debt is very rapid.

MANAGEABLE FUTURE RETIREE COSTS: Pension and other post-employment benefits (OPEB) costs are currently manageable but pension costs tied to the state's pension system are expected to climb.

RATING SENSITIVITIES

FINANCIAL STABILITY: Although not anticipated, a period of adverse budgetary performance resulting in a decline in the city's reserves or liquidity could pressure the rating.

CREDIT PROFILE

The city is located on the southern border of New Hampshire 34 miles northwest of Boston, and had an estimated 2014 population of 87,259. Population has remained relatively flat since 2010.

STRONG FINANCIAL MANAGEMENT
The city continues to manage rising employee salary and pension costs through moderate annual tax increases and cost control measures. Property taxes are the largest revenue source and represented 75% of fiscal 2015 general fund revenues.

Property taxes have been increased annually in a measured fashion and adopted budgets were below the combined city charter imposed municipal budget spending caps of 1.7%, 2.3%, and 2.1% in fiscal 2013, 2014, and 2015, respectively. Tax collections have historically been strong and were 99.1% through fiscal end 2015. For fiscal 2015 the city had positive operating results, but a planned use of fund balance for capital expenditures and encumbrances resulted in a $4.3 million decline in the unrestricted general fund balance to $46.5 million from $50.7 million the previous year; this amount still represents a solid 18% of spending. The city's unassigned fund balance equals 11% of spending and is in compliance with its minimum 10% policy. Better revenues across many areas, particularly motor vehicle registrations, contributed to a positive budgetary revenue variance. Lower departmental costs due to conservative budgeting also contributed to a positive expenditure variance compared to budget.

The city prudently continues to include in its operating budget contributions to its capital reserve funds to support equipment and fleet replacements and other city and school improvements. The fiscal 2015 budget included a combined $2.9 million in contributions (1.2% of budget) for these purposes.

STABLE FINANCIAL EXPECTATIONS FOR FISCAL 2016
The fiscal 2016 general fund budget of $245 million reflects a 1.7% increase in expenses year-over-year. The combined municipal budgeted appropriation growth remained under its 1.5% budget cap by $50,276. The bulk of the additional spending is due to an increase in salary costs of $2.8 million (2.2%) and a $2.2 million (8.1%) increase in pension costs above the fiscal 2015 budget. Healthcare costs remained flat, as the city has taken measures to mitigate escalating costs by negotiating larger employee contributions and implementing higher co-pays and deductibles. Property taxes were increased 2.0% compared to 2.34% for fiscal 2015.

Management reports that revenues to date are tracking higher than budget and projects a modest budgetary surplus at fiscal year-end. Fitch considers this projection reasonable based on management's history of prudent and conservative budgeting practices.

The city's fiscal 2017 budget is in preliminary stages but officials have indicated that the city's budget cap is estimated to be 1.3%. Expenditure drivers continue to be salary and rising pension costs.

In Fitch's opinion, current budget flexibility exists due to historically conservative management practices and annual pay-go funding for capital and equipment expenses. Additionally, debt service and capital expenditure costs can be exempted from the budget cap with an affirmative vote by two-thirds of the city's board of alderman. Debt service expenses for fiscal 2016 are $18 million (or 7.3% of budget).

ABOVE-AVERAGE SOCIOECONOMIC FACTORS
The local economy serves as a regional retail hub with two very large shopping malls providing tax-free shopping for New Englanders. In addition to emerging as a regional center for medical services, the city also has experienced expansion in software development, defense related research and development, and the telecommunications industries. The city is home to a diverse group of international companies including Oracle, Dell, and BAE Systems. The city has two industrial parks and is experiencing continued new development and expansion activity.

The city's demographics are positive, with wealth levels equal to state and exceeding national averages. Unemployment levels decreased to 3.5% in October 2015 down from 4.3% a year prior although labor dropped by 1.3% and employment was down modestly for that period. The top 10 taxpayers represent a moderate 9.3% of fiscal 2015 taxable value.

State equalized value for fiscal 2015 of $8.7 billion increased 3.6% from the prior fiscal year after a 5.5% increase in fiscal 2014. These gains are reflective of new development and ongoing property renovations.

NET DEBT RATIOS ARE LOW
The city's debt ratios (net of state school grant reimbursements and self-supporting water and sewer debt) remain low at 1.6% of fiscal 2015 state equalized value and $1,594 per capita. Amortization is very rapid, with 80% of city and school GO debt (which excludes self-supporting debt) retired in 10 years. The city has moderate new debt plans for the future and ratios should remain low given the rapid amortization of outstanding debt.

PENSION COSTS CONTINUE TO CLIMB
The city's non-public works employees participate in the state's pension system. The city's proportionate share of the net pension liability was $185 million as of a June 30, 2014 measurement date, based on the plan's assumed 7.75% investment rate of return (IRR). Based on a 7% Fitch adjusted IRR, the estimated net pension liability is $230 million or a manageable 2.6% of the city's equalized value. The estimated ratio of the Fitch adjusted plan fiduciary net position to the Fitch adjusted total pension liability is 61%.

The state eliminated its pension cost sharing arrangement in fiscal 2012, resulting in a 25% increase in the city's contribution in fiscal 2012 from the year prior. Contribution rates increased by 24% for fiscal 2014 to $18.7 million (6.3% of the total governmental fund budget) based on the state's biannually set rate. For fiscal 2016 the rate was $21 million.

The city continues to make the full payment of amounts required by the state, but the expected additional increases in costs could put pressure on the budget.

Public works employees participate in a city-managed single employer system and the city continues to fully pay the annual required contribution (ARC). The city's net pension liability was estimated by Fitch at $8.1 million as of June 30, 2015 using a 7% IRR and the city contributed $772,343 during fiscal 2015.

The city contributed a modest $1.9 million or 45% of the fiscal 2015 OPEB ARC. An unfunded OPEB liability of $39.4 million as of July 1, 2013 reflects primarily implicit subsidy costs related to non-teacher retirees eligible to participate in the city healthcare plan at their own cost.

Carrying costs for governmental debt service (excluding Pennichuck bonds), pensions and OPEB pay-go were manageable at 13% of fiscal 2015 total governmental fund spending.

Contact:

Primary Analyst
Kevin Dolan
Director
[phone]
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004

Secondary Analyst
Parker Montgomery
Analyst
[phone]

Committee Chairperson
Steve Murray
Senior Director
[phone]

Media Relations: Elizabeth Fogerty, New York, Tel: [phone], Email: [e-mail].

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

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
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

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Dodd-Frank Rating Information Disclosure Form
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