Fitch Rates Worcester, MA's $76MM GOs and BANs, Series 2006 'A/F1+'
Fitch assigns an 'A' rating to Worcester, Massachusetts's $47 million general obligation (GO) bonds, series 2006, and an 'F1+' to the city's $29 million bond anticipation notes (BANs), series 2006A&B. The bonds are scheduled to sell competitively on Oct. 26. UniBank Fiscal Advisory Services, Inc. is the financial advisor. Fitch also affirms the 'A' rating on the city's $561 million outstanding long-term debt and the 'F1+' on its $29 million short-term debt. The Rating Outlook is Stable.
The 'A' rating reflects Worcester's historically consistent fiscal performance, prudent financial management and budgeting, strong tax base growth, and a stable employment base anchored by higher education and health care institutions. These credit strengths are balanced by the city's above-average debt levels when pension obligation bonds are included, its below-average employment, wealth, and income levels, and recent fund balance drawdowns. The 'F1+' rating on the BANs is based on demonstrated demand for the city of Worcester's long-term obligations as well as the city's long-term credit characteristics.
The second largest city in the Commonwealth of Massachusetts (GO bonds rated 'AA' by Fitch) after Boston (GO bonds rated 'AA'), Worcester is located 39 miles west of Boston, 52 miles east of Springfield, MA, and 43 miles northwest of Providence, RI (GO bonds rated 'A'). The city offers direct access to major highways -- supported by the Mass Turnpike/Route 146 interchange and Route 146/Route 290 connector -- and improved railway access from Union Station. The city's strategic location bodes well for its ambitious $1.3 billion economic revitalization effort spearheaded by the CitySquare project. The city expects that the $563 million CitySquare public-private partnership will yield more than two million square feet of residential, commercial, retail, and entertainment space in downtown Worcester. Other sizable commercial and residential investments contributed to an impressive 14.3% average annual growth in the city's tax base over the past five years.
The stable presence of nine higher education institutions including the University of Massachusetts Medical School and several health care institutions helps offset some of the city's below-average economic indicators. The 6.0% unemployment rate recorded in August 2006 was above that of both the commonwealth (4.7%) and nation (4.7%). Income levels are below average, somewhat reflecting the city's roughly 30,000-student contingent.
Worcester's historically prudent financial management has contributed to its stable fiscal performance. Audited results for fiscal 2005 indicated that combined general fund and other available reserves reached 6.1% of total spending, compared to a range of 3.6%-5.2% of total spending over the prior three years. Fitch notes, however, that fiscal 2006 expected results will show a $7.2 million decline in total fund balance, a negative 43.6% change over fiscal 2005. This is the result of spending related to collective bargaining agreements focused on new health care initiatives, long-term pension planning and public safety goals, and lower-than-expected motor vehicle excise tax revenues. The city plans to present City Council with a set of policies and financial modeling procedures to increase its fund balance and stabilization accounts; these policies indicate that 50% of free cash must go toward the fund balance to avoid such drawdowns in the future. The city's pensions are funded at 80%.
Consistent with conservative budgeting and active cost control and fiscal monitoring, the budget for fiscal 2007 represents a manageable 4.1% increase over the prior year's budget. The recently finalized collective bargaining negotiations with 19 of 22 unionized groups, or 97% of the city's unionized employees, should provide the city with a degree of financial stability in the coming years. Although the city retains a level of budget exposure with state aid as its primary revenue source, high property tax collection rates should provide ongoing financial stability.
The city's capital improvement plan (CIP) spans fiscal years 2007-2011 and totals $465 million, 38.5% of which is dedicated to economic development efforts. Net direct debt levels including pension obligation bonds are above average at $2,530 per capita or 4.6% of equalized value. Fitch expects that debt levels will remain above average as the city continues to invest in infrastructure maintenance and building rehabilitation while benefiting from active state and private sector investments in economic development projects. Debt service consumes an above-average 11.8% of total expenditures, and principal amortization rates are average with 56.7% retired in 10 years.
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