New Issue: Moody's assigns Aa1 rating to Hartford MDC's (CT) $58.9 million General Obligation Bonds, Issue of 2013, Series A & B; outlook is stable Global Credit Research - 24 Jan 2013 Maintains Aa1 rating and stable outlook on $334 million in outstanding parity debt HARTFORD COUNTY METROPOLITAN DISTRICT, CT Other Special Districts CT Moody's Rating ISSUE RATING General Obligation Bonds, Issue of 2013, Series A Aa1 Sale Amount $32,238,000 Expected Sale Date 01/29/13 Rating Description General Obligation General Obligation Bonds, Issue of 2013, Series B Sale Amount $26,690,000 Expected Sale Date 01/29/13 Rating Description General Obligation Aa1 Moody's Outlook STA Opinion NEW YORK, January 24, 2013 --Moody's Investors Service has assigned a Aa1 rating to the Hartford County Metropolitan District Commission's (MDC) $58.9 million General Obligation Bonds, Issue of 2013, Series A and B. Moody's maintains a Aa1 rating and stable outlook on the MDC's outstanding $334 million in long-term G.O. debt. SUMMARY RATINGS RATIONALE The bonds are secured by a general obligation pledge of the district and unlimited tax authority of the eight member communities, and are being issued to permanently finance notes that are maturing on February 14, 2013. The Aa1 rating reflects the above average and relatively stable credit strength of the authority's large service area, a wellmanaged but growing overall debt burden, and a satisfactory financial position. The rating also incorporates the sizeable long-term liabilities of the district for pension and Other Post Employment Benefits (OPEB). The stable outlook reflects Moody's expectation that the MDC will continue to effectively manage its financial position, including the implementation of timely rate increases and the augmentation of its reserve levels. STRENGTHS -- Sizeable tax base with strong credit quality -- Sole rate setting authority, with ability to levy unlimited property taxes on member communities -- Recent implementation of rate increases has helped stabilize financial position -- Strong member approval for compliance-related capital projects CHALLENGES
-- Debt burden likely to increase as borrowing continues for Clean Water Project -- Significant long-term liabilities for pension and OPEB DETAILED CREDIT DISCUSSION DEBT BURDEN CONTINUES TO INCREASE; LARGE CAPITAL PLAN DUE TO FEDERAL AND STATE CONSENT ORDER AND CONSENT DECREE The district had entered into a consent order and a consent decree with the State Department of Environmental Protection, Department of Justice and US Environmental Protection Agency to address sanitary sewer overflow, nitrogen reduction and combined sewer overflow issues by 2020. In order to address these issues management has designed a comprehensive plan, named The Clean Water Project (CWP). In November 2006, the voters of the district approved an $800 million referendum for Phase 1 of the CWP and established a Project Management Unit to oversee all aspects of the project. Phase 1 authorizations were fully committed during the current fiscal year, and on November 6, 2012 voters of the district approved an additional $800 million referendum (cumulative total of $1.6 billion) for Phase 2 of the project. Overall, the project is currently anticipated to cost $2.1 billion, and will be funded through a mix of state and federal grants (15-20%), state and federal low cost loans (30%) and open market debt. The board adopted a sewer surcharge for customers who receive both water and sewer service which is dedicated solely to the payment of principal and interest of debt for the CWP. The district started collecting this new revenue in January 2008 and has collected a total of $72 million to date, while expending roughly $16 million. The sewer surcharge is currently $1.90 per hundred cubic feet for fiscal 2012, and is expected to increase to $5.45 by fiscal year 2020. Debt service for the CWP is expected to be fully funded with sewer surcharge revenue, mitigating the impact on the member municipalities. Moody's believes the district's overall debt burden (3.6% of equalized net grand list) will continue to increase over the next several years as the district finances the CWP, however, the MDC's net direct debt burden (1.6% of ENGL) is expected to remain manageable given the self-supporting nature of the CWP and water utility operations. Principal amortization remains slow with 54.9% of principal being retired within 10 years, reflecting the long useful life of the financed assets. TIMELY RATE INCREASES CRITICAL TO MAINTAINING FINANCIAL FLEXIBILITY; ESCALATING FIXED COSTS EXPECTED TO CONTINUE TO PRESSURE OPERATIONS After a period of narrowed liquidity and weakened financial flexibility in the district's water fund, the MDC has taken steps to stabilize its financial operations over the last two fiscal years. Debt service coverage improved to 0.98 times in fiscal 2011 (net of current year non-cash OPEB expense), largely as a result of a 10% water rate increase. While this coverage remains narrow, it is a significant improvement over fiscal 2009 levels when the water fund's coverage was just 0.83 times. Prior to the large fiscal 2011 increase, the MDC raised its rates a more modest 2.4% in fiscal 2010, and reduced its rates by 6.3% in fiscal 2009, resulting in much narrower operations. Year end projections for 2012 (12/31 fiscal year end) indicate another increase in debt service coverage to a more comfortable 1.42 times, which would represent the highest level since 2008. The 2012 budget included another rate increase of 3.4%. The district's General Fund, which accounts for sewer operations, recognized a modest $204,669 operating surplus (after transfers), driven largely by conservative budget management. The fiscal 2011 total General Fund balance increased slightly to $15.1 million, representing approximately 25.3% of revenues. While this surplus is a modest improvement over fiscal 2010, the fund's reserve position has declined significantly since 2008, when total General Fund balance was $18.4 million, or a stronger 36.1% of fiscal 2008 revenues. The decline in reserves over the last few years is largely the result of lower than budgeted revenues and unreplenished fund balance appropriations. Positively, the district maintains a number of additional funds which serve to relieve pressure on the General Fund by providing resources for debt service, capital improvements or one-time appropriations. Approximately $2.4 million of unencumbered fund balance is available in the Assessable Sewer Fund to be used for service expansion in lieu of borrowing; expansion costs are typically repaid through homeowner assessments over time. Additionally, $5.3 million is available in the Debt Service Fund. The balance of both of these funds is down from fiscal 2011, with the unencumbered balance of the Assessable Sewer Fund down by 68% since 2007. While these funds are maintained separately from the General Fund, the district does maintain the ability to utilize these resources to cover exceptional, one-time costs.
The district maintains a single employer, defined-benefit pension plan for all employees. The Aetna Insurance company is the administrator of Metropolitan District Employees' Retirement System (MDERS), and as of January 1, 2011, the plan was funded at 73.6%. While the current funding level is adequate, it represents a significant reduction from the plan's 2007 funding level of 92.8%. The decline in funding can be attributed to market losses during this time, as well as the implementation of an early retirement incentive. The district is currently funding its Other Post Employment Benefit (OPEB) obligation on a pay-as-you-go basis. In fiscal 2011, the district fully funded its required contribution for OPEB, representing $20 million. The total Unfunded Actuarially Accrued Liability (UAAL) for OPEB is a sizeable $219 million, as of January 1, 2011. OPERATIONS SUPPORTED BY GENERAL OBLIGATION PLEDGE OF MEMBER COMMUNITIES The district has a diverse set of revenue streams and is authorized to levy unlimited taxes on its eight member municipalities, comprised in the following proportions, to support debt service (General Obligation rating in parentheses): Bloomfield (Aa2) 7%, East Hartford (Aa2) 12%, Hartford (A1/ stable outlook) 28%, Newington (Aa2) 9%, Rocky Hill (Aa2) 6%, West Hartford (Aaa/ negative outlook) 22%, Wethersfield (Aa2) 8%, Windsor (Aa1) 9%. In aggregate, the member communities comprise a substantial $35 billion equalized net grand list (ENGL). Wealth and employment statistics mirror state medians, balancing the well-below average socioeconomic indices of Hartford and the concentration of wealth in the suburban ring. Outlook The stable outlook reflects our expectation that the district will continue to manage its financial operations effectively through the augmentation of its reserve levels, the implementation of timely rate increases, and management of sound debt service coverage levels. In addition, Moody's expects that the MDC will effectively manage the increasing fixed costs as the district assumes additional borrowing for mandated system improvements. What could change the rating - UP: -- Continued improvement of district water utility operations -- Improved liquidity positions in all funds -- Significant progress towards funding long-term liabilities for pension and OPEB -- Improvement of service area's composite credit strength What could change the rating - DOWN -- Substantial reduction of cash reserves and financial flexibility -- A prolonged period of minimal rate increases, shifting funding of capital needs and long-term liabilities to the future -- Higher than anticipated debt levels -- Deterioration of service area's composite credit strength -- Failure to effect mid-year rate adjustments or expenditure controls, if necessary -- Failure to address long-term liabilities for pension and OPEB KEY STATISTICS Aggregate Service Area Population 366,585 2010 per capita income (Hartford County): $33,151 (90.1% of state, 121.3% of nation) 2012 Equalized Net Grand List (ENGL): $35 billion 2012 ENGL per capita: $95,262 Direct debt: 1.6%
Debt burden (includes overlapping debt): 3.6% Payout of principal (10 years): 54.9% FY11 General Fund balance (Sewer operations): $15.1 million (25.3% of General Fund revenues) FY 11 Unassigned General Fund balance: $10.9 million (18.3% of General Fund revenues) FY11 Assessable Sewer Fund balance: $2.4 million Debt Service Fund balance: $5.3 million Post-sale parity debt outstanding: $393 million The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Analysts Thomas Compton Lead Analyst Public Finance Group Moody's Investors Service Geordie Thompson Backup Analyst Public Finance Group Moody's Investors Service Edward Damutz Additional Contact Public Finance Group Moody's Investors Service Contacts Journalists: (212) 553-0376 Research Clients: (212) 553-1653 Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007
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