Summary: Stonington, Connecticut; General Obligation; Note Primary Credit Analyst: Rahul Jain, New York 212-438-1202; rahul.jain@spglobal.com Secondary Contact: Victor M Medeiros, Boston (1) 617-530-8305; victor.medeiros@spglobal.com Table Of Contents Rationale Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2017 1
Summary: Stonington, Connecticut; General Obligation; Note Credit Profile US$20.0 mil GO BANs ser 2017 dtd 11/01/2017 due 10/31/2018 Short Term Rating SP-1+ New US$20.0 mil GO bnds ser 2017 due 11/01/2037 Long Term Rating AA+/Stable New Stonington Twn GO bnds ser 2016 due 10/15/2036 Long Term Rating AA+/Stable Affirmed Stonington Twn GO BANs ser 2017 dtd 11/01/2017 due 10/31/2018 Short Term Rating SP-1+ Affirmed Rationale S&P Global Ratings assigned its 'AA+' rating to Stonington, Conn.'s series 2017 general obligation (GO) bonds and its 'SP-1+' rating to the town's 2017 bond anticipation notes (BANs). At the same time, we affirmed our 'AA+' rating on the town's outstanding GO debt. The outlook is stable. The town's full-faith-and-credit pledge secures the bonds and notes. Officials plan to use series 2017 bond and BAN proceeds to finance two school construction projects. The short-term rating reflects our view that Stonington maintains a very strong ability to pay principal and interest when the BANs come due. In our opinion, the town has a low market-risk profile because it maintains strong legal authority to issue long-term debt to take out the BANs, and it is a frequent debt issuer that regularly provides ongoing disclosure to market participants. The 'AA+' rating reflects our view of the following factors for the town: Strong economy, with projected per capita effective buying income at 148% of the national level and market value per capita of $206,699; Strong management, with "good" financial policies and practices under our Financial Management Assessment methodology; Strong budgetary performance, with operating surpluses in the general fund and at the total governmental fund level in fiscal 2016; Very strong budgetary flexibility, with an available fund balance in fiscal 2016 of 23% of operating expenditures; Very strong liquidity, with total government available cash at 20.8% of total governmental fund expenditures and 2.8x governmental debt service, and access to external liquidity we consider strong; Adequate debt and contingent liability position, with debt service carrying charges at 7.3% of expenditures and net direct debt that is 126.4% of total governmental fund revenue, as well as low overall net debt at less than 3% of market value; and Strong institutional framework score. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2017 2
Strong economy We consider Stonington's economy strong. The town, with an estimated population of 18,374, is located in New London County. The town has a projected per capita effective buying income of 148% of the national level and per capita market value of $206,699. Overall, the town's market value grew by 0.8% over the past year to $3.8 billion in 2018. The county unemployment rate was 5% in 2016. The town covers approximately 43 miles in southeast Connecticut, about 16 miles from New London and 48 miles from Providence, R.I. Market values have grown by about 1% over the past two years. About a quarter of property is residential, with about 14% used for commercial and industrial uses. The town benefits from direct access to Interstate 95 and Amtrak passenger rail service. We note incomes in the town have slightly weakened in recent years, partially due to changes in the town's industrial mix. The town's large employer mix reflects its manufacturing history and shift to services-based employment, particularly in the retail and accommodation industries. The five largest employers are: Town of Stonington (including the Board of Education), Davis Standard, Mystic Seaport, Mystic Aquarium, and Stonington Retirement Home. Given the town's continued slow, but steady, market value improvement and steady jobs market, we do not expect to change our view of the town's strong employment health the near term. Strong management We revised our view of the town's management to strong from standard, and consider its financial policies and practices "good" under our Financial Management Assessment methodology, indicating financial practices exist in most areas, but that governance officials might not formalize or monitor all of them on a regular basis. Highlights include management's conservative budgeting assumptions, coupled with a minimum historical trend analysis of three years. Reporting of budget-to-actual results is done quarterly for the board of selectmen, as per its monthly reporting policy. There is no long-term financial plan but the town maintains a formal five-year capital improvement plan that is updated annually and identifies funding sources and uses. A formal reserve policy limits available reserves to a minimum of two months of total general fund expenditures, which the town has historically adhered to. The town also recently adopted a formal investment policy which adheres to and builds on state guidelines; management is in the process of formalizing the new policy. The town adopted a debt management policy in October 2017 that sets targets for carrying charge and maximum debt as share of assessed value, and requirements over types and uses of debt. Strong budgetary performance Stonington's budgetary performance is strong in our opinion. The town had operating surpluses of 1.9% of expenditures in the general fund and 2% across all governmental funds in fiscal 2016. We expect the town to generate another operating surplus in fiscal 2017, which ended June 30, its third consecutive WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2017 3
positive result. The most recent audited results--for fiscal 2016--show positive variance in general government and public safety items and better-than-budgeted property tax revenues based on conservative property tax collection estimates. Our analysis adjusts for the use of bond proceeds for capital projects in fiscal 2016. Despite an expected appropriation of $550,000, officials anticipate a surplus of about $1.2 million in fiscal 2017, supported by continued savings in general government spending as well as continued conservative budgeting for revenues and expenditures. The town has also benefited from higher revenues through a steady increase its mill rate in recent years, part of which was done to manage anticipated increases in debt service, which is expected to peak in 2019. The fiscal 2018 budget includes projected fund balance use of about $1.9 million. This figure anticipates the use of reserves for capital projects as well as $850,000 in contingency for state-aid cuts. Given the town's history of raising taxes as necessary to maintain structural balance, conservative revenue and expense projections, and some flexibility in staffing and capital spending, we believe the town will maintain strong results over the near term, notwithstanding the potential for adequate results in the current year. We do note that a significant drop in state aid, coupled with an increase in costs related to the teachers' retirement plan, could result in our changing our view of the town's performance. However, we do not anticipate the town will experience a significant change in its revenue and expenditure profile. Very strong budgetary flexibility Stonington's budgetary flexibility is very strong, in our view, with an available fund balance in fiscal 2016 of 23% of operating expenditures, or $15.2 million. The town has maintained very strong reserves in each of the past three years. All of the town's contracts are current, with the earliest expiration in June 30, 2019, reducing a potential area of cost uncertainty. Given our expectation of a surplus in fiscal 2017 and the potential regeneration of the appropriated fund balance in fiscal 2018, we do not anticipate changing our view of the town's flexibility in the near term. However, we recognize the town is likely to experience a significant reduction in state aid in the current and subsequent fiscal years, based on current discussions at the state level and the town's economic indicators and current financial position. We note management has generally remained conservative in its budgeting and has been willing to take steps to raise revenues. As such, we believe the town will be able to manage toward a balanced budget if a reduction in state aid were to continue. In addition, we note that a drop in state support for teachers' pensions--which we consider unlikely--could stress the town's finances, requiring a further review of the town's flexibility. Very strong liquidity Stonington's liquidity is very strong, with total government available cash at 20.8% of total governmental fund expenditures and 2.8x governmental debt service in 2016. In our view, the town has strong access to external liquidity if necessary. The town regularly accesses the capital markets, having issued bonds and notes frequently over the past several years. Stonington has no variable-rate or direct-purchase debt, which may include provisions that allow for the acceleration of debt service. In addition, the town's investments are in certificate of deposits, money market, and mutual funds, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2017 4
which we consider liquid and not aggressive. We expect the town to maintain its very strong liquidity metrics during our outlook period. Adequate debt and contingent liability profile The debt and contingent liability profile is adequate. Total governmental fund debt service is 7.3% of total governmental fund expenditures, and net direct debt is 126.4% of total governmental fund revenue. Overall net debt is low at 2.4% of market value, which is in our view a positive credit factor. With the issuance of these bonds and notes, the town will add substantially to its debt. However, we understand the town does not plan to issue more new-money debt over the near term. The town has steadily increased its mill rate in recent years to manage anticipated increases in expenses associated with the school construction, and while pressure from state-aid cuts may lead to further tax hikes, we believe the town has the ability to manage an increase in debt service carrying charges. Stonington's combined required pension and actual other postemployment benefits (OPEB) contributions totaled 2.7% of total governmental fund expenditures in 2016. The town made 99% of its annual required pension contribution in 2016. The town contributes to the Stonington Retirement Plan, a locally administered pension plan for general town employees, as well as the Connecticut Municipal Employees Retirement System (MERS) for public safety employees. The town's plan has a net pension liability of $4.9 million and was 85.7% funded as of June 30, 2016. The assumed discount rate is 6.75%. Its proportionate share of the state's MERS plan was about $2 million of June 30, 2015. The MERS funded ratio was 88.3% as of June 30, 2016. Educational staff are part of the state Teachers Employment Retirement System and the town does not maintain a proportionate share of that liability as per its 2016 audit. The town has prefunded part of its OPEB liability in the past. The OPEB liability totaled $4.5 million as of July 1, 2013, with a funded ratio of 13%. The town also maintains a defined-contribution retiree health care plan, established for police officers in 2004. Strong institutional framework The institutional framework score for Connecticut municipalities is strong. Outlook The stable outlook reflects our opinion of Stonington's strong economic indicators and very strong liquidity and budgetary flexibility, which we believe are likely be maintained in the next two years despite headwinds at the state level. While performance may be only adequate performance in the current year, we believe Stonington will maintain a strong budgetary performance going forward through conservative budgeting and necessary budgetary adjustments. Therefore, we do not expect to change the rating within our outlook period. Downside scenario If the town were to continue to use fund balance to offset the anticipated drop in state aid, as opposed to addressing a potential structural imbalance with commensurate revenue adjustments, resulting in a pattern of weak performance WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2017 5
and declining fund balance, we could lower the rating. Upside scenario Should economic indicators improve to levels associated with higher-rated peers, and the town is able to sustain very strong budgetary flexibility and improve its management policies and procedures, we could raise the rating. Related Research S&P Public Finance Local GO Criteria: How We Adjust Data For Analytic Consistency, Sept. 12, 2013 Incorporating GASB 67 And 68: Evaluating Pension/OPEB Obligations Under Standard & Poor's U.S. Local Government GO Criteria, Sept. 2, 2015 Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2017 6
Copyright 2017 by Standard & Poor s Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an as is basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. STANDARD & POOR S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor s Financial Services LLC. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 12, 2017 7