The firm is one of a handful of ratings agencies that issues reports on the financial status of municipalities, usually twice a year in April and August.
The good news is Fitch did not downgrade the town’s bond rating, holding it at BBB+. But it maintains a negative outlook for Hamden, mostly based on its low fund balance and high pension obligations. But there are signs of improvement, according to the report.
The pension fund, which in the past two decades has at times been woefully underfunded, is more than $400 million short of recommendations. Mayor Scott Jackson has said that rebuilding the fund is his top priority and spearheaded the $125 million bonding the Legislative Council approved last year. Jackson also has continually increased the town’s annual contribution to the fund.
From the report, these are the “key rating drivers” to its rating report:
- Slow pension funding progress: The Negative Outlook is based on the poor funding of the town’s pension plan and the need for substantial tax rate increases or benefits reform to avert plan insolvency.
- Slim financial reserves: The Negative Outlook also reflects Fitch’s concern that satisfactorily addressing the severely underfunded pension will be particularly challenging given the town’s other financial pressures, including marginal reserves.
- Tax increases helping operations: Management forecasts positive, albeit modest, operating results in fiscal 2014 and is proposing another tax increase in the fiscal 2015 budget, primarily to provide increased pension contributions. Even with the increase, the annual payment would fall well short of the actuarially-based contribution.
- Strong demographic profile: Wealth levels are favorable and the poverty rate is low. The area economy benefits from a strong education and healthcare sector, and an unemployment rate which approximates the national rate.
- Debt expected to rise: The planned issuance of pension obligation bonds (POBs) will almost double the town’s outstanding debt while only partially addressing the unfunded liability. Overall debt metrics would still not be high.
The town isn’t making enough progress to eradicate its pension funding liability, according to the report, despite the mayor and the Legislative Council approving bonding $125 million last year to shore up the fund. Even with that amount, the fund is still several hundred million dollars short, and the council is now considering a 2014-15 budget that again increases the town’s contribution to the fund to $18 million.
Even with the bonding, the town needs to continue to increase that contribution, the report states. “Proceeds of POBs [Pension Obligation Bonds], absent benefit reform or increased town contributions, would only delay plan insolvency by 10 years,” it says.
Also key is negotiating concessions from the unions, it says, which has not yet begun.
“The town has not formally initiated pension reform discussions with labor and such discussions may not occur until 2015 for guardian (police and fire) employees and 2016 for service employees, based on the stated expiration in the last amendments to the pension plan,” the report states. “The actuarial report contemplated nearer term implementation of possible benefit reforms; a longer timeline for reform will entail some combination of tax rate increases, further POB issuance and expenditure reductions. Maintenance of financial health while addressing pension solvency is key to credit health.”
The town’s financial profile is “improving but still weak,” the report says, pointing to Quinnipiac University and Ardenhouse Care and Rehabilitation Center as two of the town’s greatest assets.
“This rating agency evaluation was one of the most challenging to date, as their focus was primarily on pension improvements,” Chief Administrative Officer Curt Balzano Leng said. “We’re proud to hold the and not be downgraded when so many municipalities are.
“Fitch told us that nearly every meaningful financial indicator, fund balance, internal service funds, operating budget surpluses, balanced budgeting and meaningful financial strategic improvement, were all improved or moving in the right direction.”
The town has raised taxes but has room to increase them more, according to the report.
“The town enacted tax rate increases in each of the past four years, with a total rate increase of 32.4 percent,” it says. “According to 2012 levy per capita data compiled by the state, the town was in the lower half of municipalities in the state, affording some room for tax increases.”
In order to make the annual required contribution (ARC) to the pension fund, taxes will have to continue to rise, the report says.
“Tax increases to date have improved general fund structural balance, but full pension ARC funding is far from achieved and financial operations remain weak.”