Fitch Rates Groton, CT 2006 GOs 'AA-' & GO BANs 'F1+'; Affirms GOs at 'AA-'.

NEW YORK -- Fitch rates the town of Groton, CT's $16.57 million general obligation (GO) bonds, Issue of 2006 'AA-', its $23.1 million GO bond anticipation notes (BANs) Lot A 'F1+', and $1.13 million BANs Lot B 'F1+'. The bonds and BANs are scheduled for competitive sale on Oct. 19. The bonds mature serially Oct. 1 2007-2026, with semiannual interest payments on April 1 and Oct. 1, commencing April 1, 2007. The BANs Lot A mature on Oct. 30, 2007 and Lot B mature on June 30, 2007. Fitch also affirms the 'AA-' rating on the county's approximately $15.1 million outstanding GO bonds. The Rating Outlook is Stable.

The 'AA-' rating reflects Groton's strong financial management and sound financial performance, low debt burden, and rapid amortization. The stable economic base is also an important credit strength anchored by Pfizer, General Dynamics Corp.'s Electric Boat division (EB), and the New London submarine base (the base). The base is the town's largest employer and its exclusion from the final base realignment and closure (BRAC) list in 2005 has at least temporarily alleviated negative pressure on the outlook for the regional economy. While the town expects short-term employment losses from restructuring at Pfizer and EB, long-term employment prospects are good with expected expansions of Pfizer's research operation and a long-term contract in place between EB and the U.S. government for submarine construction. Connecticut's two major resort casinos, within 15 minutes from Groton by car, add further stability to the regional economy and local employment base. While the town is embarking on a major school renovation and replacement plan, low debt levels, a comprehensive debt affordability policy, and substantial capital support from the state provide ample capacity to retain manageable debt levels over the long term.

The town, located midway between New York and Boston, has 40 miles of coast line on three bodies of water. With a population of roughly 40,000, the economic base has shown stability over a long period, with contractions at EB mitigated by expansions at Pfizer, mitigating the risk posed by its top two taxpayers and employers (EB and Pfizer) accounting for about 25% of the tax base. The unemployment rate has been consistently below the national average and dipped below the state average in 2001, holding its strong relative position. Connecticut's per capita income ranks first in the nation and Groton's income indicators are below the state but just above the national average. While the town has effectively managed historical adjustments in its concentrated employment base, management is taking a new approach by actively seeking diversification of the local economy over the long term, recognizing the remaining potential for a future base shutdown despite the recent success in maintaining base operations in the latest BRAC round. The town is considering next steps in accordance with its recently completed economic development strategic plan and has already begun infrastructure expansions to enable commercial expansion throughout the town to complement recent retail construction. There are further plans to expand and beautify its maritime tourism sites.

The town has continued to improve financial margins in recent years following state aid reductions and the use of reserves to provide tax relief in the face of growing assessed valuation (AV). Fiscal 2005 results show a strong $12.1 million unreserved general fund balance, or 12% of expenditures and transfers out, well above the town council's adopted 5% policy. Fiscal 2006 unaudited results show a modest $806,000 net operating deficit, significantly lower than the budgeted $3.5 million due to budgeting of state aid based on conservative state estimates. The expiration of tax exemptions led to a 5.3% increase in taxable assessed value that affects tax revenues and state aid in the 2007 budget. The fiscal 2007 budget, nearly 6% above 2006 projected results, includes a 4.8% tax rate increase and a $2.3 million appropriation of unreserved fund balance. The fund balance appropriation is not expected to be utilized in total given conservatively budgeted revenues and expenditures.

The town's major capital need is for new school infrastructure. Following two failed referenda, a $91.9 million special referendum was passed with a strong 81% voter approval rate in April 2004 for phase I of the town's three-part school construction plan. The first phase, focusing on critical educational needs, includes the construction of two new elementary schools and renovations and additions to a high school. The town expects to seek voter approval for debt funding of future phases in 2008 to meet these needs. The town's school construction program is manageable given its overall low debt ratios at $1,565 per capita, or 1.67% of market value, including this issue. Additional flexibility is afforded by rapid debt retirement, including this issue and all sewer district-related debt, at 67% in 10 years.

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