City rating downgraded by Fitch, cited for budget challenges ahead

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City HallMANCHESTER, NH – According to information released Nov. 17 on, the city’s Fitch Rating has been downgraded on two items:

  • $122.5 million general obligation bonds (GOs) to ‘AA’ from ‘AA+’;
  • $58.8 million school facilities revenue bonds to ‘AA-‘ from ‘AA’.

The Rating Outlook is Stable, according to the report.

Mayor Ted Gatsas said on Monday he hadn’t yet seen the report, and declined to comment until he has a chance to review it.

Fitch Ratings range on an alphabetic scale, from ‘AAA’ to ‘D’ and uses intermediate +/- modifiers for each category between AA and CCC.

Investment grade explained:

  • AAA  : the best quality companies, reliable and stable
  • AA  : quality companies, a bit higher risk than AAA
  • A  : economic situation can affect finance
  • BBB  : medium class companies, which are satisfactory at the moment

The GOs are backed by the city’s full faith and credit and unlimited taxing power.

The school facilities revenue bonds are special obligations of the city, payable from appropriations made by the city pursuant to a financing agreement which is not subject to termination for cause by either party.


DOWNGRADE REFLECTS VOLATILITY OF FINANCIAL POSITION: Fitch believes the city’s financial position is subject to some unpredictability, as indicated most recently by a notable unbudgeted deficit in fiscal 2014. This is the third such unplanned deficit since fiscal 2008.

CONTINUED BUDGETING CHALLENGES: Importantly, the city voted to exceed its tax cap for fiscal 2015 to address the aforementioned budget deficit, butScreen Shot 2014-11-17 at 5.46.29 PM other challenges remain including rising pension costs, and the tax cap will likely challenge the city’s ability to rebuild reserves going forward.

AFFORDABLE DEBT POSITION: Key debt metrics should remain manageable based on modest future issuance plans.

LOW FUNDED PENSION: The combined Fitch-adjusted funded status of the city’s pension plans approximates a low 61%, and expected higher contributions would erode budgetary flexibility.

REGIONALLY IMPORTANT ECONOMY: Manchester serves as the anchor for a variety of economic activities in the northern New England area. Unemployment remains well below the national average.

Screen Shot 2014-11-018RATING SENSITIVITIES

The ratings are sensitive to the city’s ability to stabilize financial operations and strengthen reserves, as the current fund balance position offers a modest cushion to address unforeseen spending needs and budgetary challenges going forward.


Manchester is located in Hillsborough County, New Hampshire, approximately 60 miles north of Boston, Massachusetts. The city is bisected by the Merrimack River, and Interstates 93 and 293 intersect within the city. The city is the largest in northern New England with an estimated 2013 population of 110,378, showing slight growth of 3.2% since the 2000 census.


Preliminary unaudited fiscal 2014 results indicate a roughly $3 million draw on already narrow general fund reserves. Fiscal 2013 unrestricted fund balance totaled $11 million or 8.1 percent of spending. Health insurance costs were roughly $4.5 million over budget, leading to the use of fund balance. The city negotiated changes to its health care coverage plan that produced savings in the prior two fiscal years and had budgeted for further savings in fiscal 2014, but those savings were not recognized. The city feels that they have addressed this shortfall in the fiscal 2015 budget by increasing budgeted health insurance spending to $12.7 million, up from $7.8 million in fiscal 2014 funded by increased property taxes and other revenues.

The city’s fiscal policy establishes a 5 percent rainy day reserve, which is included as part of the unrestricted fund balance noted above. Fitch believes this level is somewhat low given the recent volatility of the city’s finances. Any additional reduction of reserves would pressure the city’s ability to remain in compliance of the policy.


Fiscal 2015 spending represents a 4 percent increase over the 2014 budget and is balanced without an appropriation of reserves. Property taxes fund over 60 percent of the budget. Collection rates are steady and there is no material tax base concentration. Non-property tax revenues are budgeted to improve a modest $550 thousand from fiscal 2014.

The general fund also budgets an annual dividend from the surplus cash flow of the municipal parking system, totaling $3 million in the fiscal 2015 budget. The city has significantly reduced general fund subsidies to the recreation fund. The recreation fund has a cumulative net deficit of $4.8 million including a $6.1 million liability to the general fund from prior year’s advances.


A voter approved amendment to the city charter limits growth in both expenditures and tax revenue to the average increase in the national consumer price index for the prior three years. Fitch believes the cap generally limits budgetary flexibility and will likely create difficult spending decisions for the city. However, the board of aldermen voted to exceed the cap for the fiscal 2015 budget, showing the willingness and ability to raise revenues when necessary. Debt service expenditures are excluded from the cap, which can be overridden with a two-thirds vote of the city’s board of alderman.

The city also retains the ability to increase certain service charges and licenses, which account for a considerable 15 percent of general fund revenue. The current rating assumes the city will act in a manner that preserves a financial cushion consistent with internal policies at a minimum.


Net direct debt per capita ($2,006) and as a percentage of market value (2.6 percent) is considered moderately low by Fitch. Capital needs are manageable. The city expects to come to market with new debt of about $15 million in early 2015, primarily for vehicle replacement. Fitch does not believe this debt will materially impact the city’s debt profile.


The city maintains two single-employer defined benefit pension plans. The combined funded status of the city’s plans is weak at 62.6 percent, or an estimated 61.1 percent using a Fitch-adjusted 7 percent investment rate of return. The unfunded actuarial accrued liability has risen sharply but still remains somewhat manageable relative to the city’s tax base (1.25 percent using a Fitch-adjusted 7 percent investment rate of return).

The city faces some hurdles if it attempts to change participant benefits as all changes require state legislature authority and city voter referendum.

The city also participates in the New Hampshire Retirement System. Funding of the state’s pension system has declined significantly over the past decade; as of June 30, 2013 the state’s pension system funded ratio was just 56.7 percent. The poor funding of this plan could result in increased contributions from the city.

Carrying costs for debt service, pension and OPEB were a sizable 21.23 percent of governmental spending in fiscal 2013, although debt amortization is rapid at 67.4 percent retired in the next 10 years. Increased pension contributions required as a result of the low funding levels could strain the city’s budget, as pension costs are included in the tax and spending cap.


Manchester remains a significant presence within the northern New England economy. The city serves as a regional financial center, with leading employers including TD Bank and Citizens Bank with 900 and 850 employees, respectively.

Manchester is also home to several higher educational institutions including Southern New Hampshire University, University of New Hampshire at Manchester, and Saint Anselm College. Manchester owns and operates the Manchester-Boston Regional Airport, the sole airport in the state providing scheduled commercial jet service.

The city’s August 2014 unemployment rate of 4.5 percent is well below the national average of 6.3 percent and did not exceed 7.1 percent on an annual basis since the economic downturn in 2007. Per capita and median household income statistics are in line with the national average.

Additional information is available at

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, Underwriter, Bond Counsel, Underwriter Counsel, and Trustee.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

U.S. Local Government Tax-Supported Rating Criteria

Additional Disclosure

Solicitation Status


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