Fitch Affirms New Britain, Connecticut Outstanding GOs at 'A'; Outlook to Stable.

NEW YORK -- Fitch Ratings affirms the 'A' rating on New Britain, CT's (the city) $217.3 million outstanding general obligation bonds (GOs). The Rating Outlook is revised to Stable from Negative.

The underlying 'A' rating reflects the city's steady financial performance, characterized by conservative budgeting consistently yielding operating surpluses since the late 1990s. City revenues are highly dependent upon potentially volatile state aid, although this dependence remains stable and revenue growth in most years outpaces spending. The city preserves stable fund balance levels, albeit thin, despite the below-average income levels, above-average debt burden, and somewhat stagnant employment base.

The revision in the Rating Outlook to Stable is based on the maintenance of the city's current net variable-rate debt exposure of 2% given that a swaption, which would have increased the city's variable-rate debt to a high 34% of outstanding debt, was not exercised by the counterparty. While the swaption was not executed, Fitch believes the city's new interest-rate risk management policy allowing the city's net variable-rate exposure to reach 50% of outstanding GO debt, excluding the city's pension obligation bonds, is aggressive for a municipality at its current rating level. Although the city has no current plans, any further actions raising the variable-rate debt exposure significantly could result in credit deterioration due to the potential added budget pressure in the event of rising interest rates and the city's minimal financial flexibility.

Located approximately eight miles southwest of Hartford with a population slightly more than 71,000, New Britain's employment base is diversified but somewhat stagnant. Residential employment decreased in the past four years, and while the unemployment rate has historically been above state and national averages, the 2004 unemployment rate shows nominal improvements. The city saw a much needed boost to its tax base with the 2002 revaluation yielding a net 33% increase in assessed valuation (AV), effective in fiscal 2004, but has remained flat since then. Income levels are below national averages.

A key credit strength is the city's history of recording operating surpluses even during recessionary periods. The city's consistent financial performance continued in fiscal 2004 with an unreserved fund balance of $6.6 million or 3.3% of spending. Similarly, fiscal 2005 year-end projections show another operating surplus, raising the total fund balance closer to management's goal of 5% of spending. Despite the city's use of nonrecurring revenue, stemming from property sales, the structural budget gap is a manageable 3% of spending. Furthermore, the city does not appropriate the fund balance, and the conservative nature of the city's budgeting typically yields positive operating results.

New Britain's debt burden is high; however, capital needs are manageable as evident by the recent 68% bond authorization reduction. Net debt totals $2,612 per capita and 7.38% of market value, with pension obligations constituting 45% of total outstanding principle.