Fitch Rates Wilmington, DE's $37.3MM GOs 'AA-'; Outlook Stable
NEW YORK -- February 22, 2013
Fitch Ratings assigns an 'AA-' rating to the following Wilmington, Delaware
(the city) general obligation (GO) bonds:
--$37.3 million GO bonds, series 2013A.
The bonds are expected to sell via negotiation on Feb. 28, 2013. Bond proceeds
will be used to refund certain maturities of the city's outstanding GO bonds
for upfront savings.
In addition, Fitch affirms the following rating:
--$287 million GO bonds at 'AA-'.
The Rating Outlook is Stable.
The bonds are a general obligation of the city, for which its full faith,
credit, and unlimited taxing power are irrevocably pledged.
KEY RATING DRIVERS
VOLATILE FUNDING SOURCES: Continued maintenance of above-average reserves is a
point of paramount significance, as the city's revenue base is largely
dependent on economically sensitive taxes derived from earned income, business
profits, and real estate transactions.
PENSIONS INADEQUATELY FUNDED: Pensions are underfunded despite the city fully
funding its annual required contribution (ARC). Annual costs currently
represent an affordable portion of total government spending but are expected
to grow as the city pays down the unfunded liability.
DUAL ECONOMIC PILLARS: The city remains one of the nation's largest banking
centers, and a sizeable health care and pharmaceutical presence lends
stability to the regional economy.
SUBPAR ECONOMIC AND WEALTH INDICATORS: Economic indicators are sluggish and
include stubbornly high levels of unemployment, below-average wealth levels,
and a high incidence of poverty.
MODERATE DEBT PROFILE: Overall debt levels are moderate. The debt service
burden on total governmental funds is manageable and should remain affordable
given the absence of additional debt plans.
REDUCTION IN RESERVE LEVELS: Reserves provide considerably less cushion than
prior to the economic downturn; as a result, any future fund balance use could
place downward pressure on the rating.
The city of Wilmington is located on the western bank of the Delaware River in
the northeast corner of the state of Delaware, almost at the mid-point between
New York City and Washington, D.C. The 2011 estimated population of 71,305
shows a modest increase since the 2010 census after a gradual decline from the
Budget tightening, debt restructuring and growth in revenues have allowed the
city to record strong operating surpluses in fiscal 2011 and 2012. The fiscal
2012 unrestricted fund balance improved to $35.3 million or 25% of spending.
The city's formal reserve fund balance policy is equal to 10% of budgeted
The fiscal 2012 budget was adopted with no fund balance appropriation or tax
rate increase. Year-end results reflect an operating surplus after transfers
of approximately $7.4 million or 5.3% of spending. Wage tax revenues, the
city's largest revenue source, were 11% over budget, reflecting the city's
audit and collection initiative, improved economic conditions, and
conservative budgeting. Notable positive variances were also recorded in real
estate transfer revenues, from the sale of a large building, and licenses and
permits revenues were up due primarily to increased construction.
MODEST USE OF RESERVES ANTICIPATED IN FISCAL 2013
The fiscal 2013 budget increases 2.6% or $3.6 million year-over-year. The
increase is the result of a sharp rise ($2.3 million) in the pension
contribution due to recent market losses and the pension systems' lower
investment return assumption. Debt service increased $1.2 million reflecting a
full year of principal and interest on the city's November 2011 bond issuance,
and the costs of several public officers, previously funded by a state grant,
are being absorbed into the general fund budget at a cost of $329,000. To
offset these ongoing expenditure increases, the city has appropriated $1.96
million of fund balance in fiscal 2013, and continues to reduce spending in
other areas by consolidating agencies and streamlining services. Expected
property tax increases will help cover higher ongoing spending needs beginning
in fiscal 2014, although the forecast rapid growth in pension contributions
may remain a source of budgetary pressure going forward.
Year-to-date operations show a projected $1.5 million positive budget variance
in wage tax revenues, and expenditures are tracking close to budget.
Management is estimating a modest use of fund balance at year-end. The current
rating level assumes city fiscal decisions to maintain healthy reserves in
spite of budgetary pressures, including from pensions.
PENSION COSTS ARE PROJECTED TO PRESSURE FINANCIAL OPERATIONS
Substantially all of the city's employees participate in one of five closed
single-employer plans or the cost-sharing multi-employer state plan. For the
city's own plans, the Fitch-adjusted aggregate unfunded actuarial accrued
liability (UAAL) of $185.2 million is equal to a high 3.5% of estimated market
value, and the funded ratio is very low at 48.3%. A significant portion of the
unfunded liability is driven by the firefighters and police plans, as a result
of past unfunded benefit enhancements.
Currently pension costs account for an affordable 8% of total governmental
spending (less capital related funds). However, according to the city's
multi-year forecast, pension costs are expected to double by fiscal 2017 due
to the lowering of the investment return assumption by 50 basis points, among
other factors. Fitch will monitor the funded status of the plans and expects
the city to continue fully funding its annually required contributions.
DEBT RATIOS ARE EXPECTED TO REMAIN MODERATE
The debt burden is expected to remain moderate as modest tax base growth
offsets the limited bonding assumed in the $70.7 million fiscal years 2013 -
2018 general government capital improvement plan. Amortization is average, at
62.6% of principal retired within 10 years. Fiscal 2013 debt service is
budgeted at 8.9% of general fund spending, an increase from past levels due to
a debt restructuring in 2010.
Bonds ($23.3 million) issued by the Wilmington Parking Authority, a discretely
presented component unit, are included in the city's debt statement based upon
its guarantee to cover debt service in the event that resources of the
authority are insufficient, a guarantee that has been called upon in prior
years due to less than sum-sufficient coverage by parking receipts.
Capital projects relating to the water/sewer fund are funded by bonds with a
GO pledge though paid by revenues of the enterprise system. Fitch views the
bonds as self-supporting, after the city strengthened operations by
implementing a 16% rate increase during fiscal 2012; previously, narrow
operations led to the need to borrow from two internal service funds and the
general fund. Fitch will continue to monitor that the bonds remain
self-supporting and that the water/sewer fund does not impinge on general fund
FINANCIAL SERVICES DRIVE ECONOMY
Wilmington's economy benefits from a business climate attractive to banking
and related business services, as well as pharmaceuticals. There are signs of
recovery in the financial services industry after the volatility of the recent
financial crisis. Capital One Financial Corp. will add 500 well-paying
positions to the city as part of its acquisitions of ING Direct, another
Wilmington based bank. Citibank will relocate about 155 jobs to the city.
Considerable pharmaceutical and health care presences lend some stability to
the economy. DuPont and AstraZeneca Inc. N.A. are two of the area's largest
employers at 8,100 and 4,500 employees, respectively. The Christiana Health
Care System continues its $210 million expansion, which is slated to create
almost 600 permanent positions by 2014.
The city is located mid-way between New York City and Washington D.C. Access
to major transportation networks as well as undeveloped waterfront tracts have
encouraged residential and commercial development in the Riverfront and
downtown areas, and the city's urban renewal efforts also target other
neighborhoods in need of redevelopment. After a 2% decline in population over
the past decade, the estimated 2011 population shows a 0.6% year-over-year
Economic indicators generally remain below average, and there are pockets of
the city that continue to suffer considerable levels of poverty and blight.
Wilmington's unemployment rate consistently trends higher than the state and
national average, as non-city residents hold many of the lucrative positions
located within city limits. As of December 2012 the unemployment rate was
10.2%, down slightly from 10.3% a year prior, reflecting a decline in the
Per capita money income lags behind the state's and nation's average at 86.3%
and 91.7% respectively, and median household income is well-below state and
national levels, at 65.8% and 74%, respectively. The poverty rate is nearly
double that of the nation.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price
Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Elizabeth Fogerty, +1-212-908-0526 (New York)
Press spacebar to pause and continue. Press esc to stop.