Fitch Ratings has upgraded Princeton’s Issuer Default Rating (IDR) and General Obligation (GO) bonds to “AA+” from “AA-,” following the implementation of Fitch’s new U.S. Public Finance Local Government Rating Criteria.
Fitch said in a Thursday, July 18, release the upgrade reflects Princeton’s solid financial health, marked by ample budgetary flexibility and robust financial resilience, alongside mixed demographic and economic metrics.
“I think in my entire career that involved 2,000-plus [bond] issues, I’ve only seen that level of increase twice previously in my career,” said Jim Sabonis of Hilltop Securities, the city’s bond counsel.
“But it wasn’t just that you got the two notches up the road; it was a very positive report,” Sabonis told the Monday, July 22, council meeting. “And it reflects all the positive things you and your administration and your staff have done.”
For more than 100 years, Fitch Ratings has provided credit ratings, commentary and financial research, with more than 1,400 analysts in 28 countries and nearly 21,000 rated entities and transactions.
Princeton’s financial profile was a significant driver of the rating upgrade, Fitch said.
Fitch assessed the city’s financial resilience as “aaa,” highlighting a high level of revenue and expenditure control, which contributes to the “ample” budgetary flexibility. The city’s unrestricted general fund reserves were expected to remain above the 7.5% threshold of spending, while currently at approximately 31%. This strong reserve level provides a substantial buffer against potential fiscal shocks, Fitch said.
“There are only four other cities in Collin County, they’re really “AA+” or “AAA” by Fitch and all those are gigantic, very mature, very large cities,” Sabonis said.
Princeton’s revenue control assessment was rated “High,” indicating a strong ability to manage and generate revenues. Similarly, the expenditure control was also rated “High,” demonstrating efficient management of expenditures. Those ratings contribute to the city’s overall financial resilience and flexibility, the ratings service said.
Princeton has experienced robust population growth, which was seen as a key positive demographic factor. The city’s population trend was assessed as “Strongest,” with a 12% median annual percentage increase over 10 years. Such rapid growth supports the local economy and adds to the city’s financial stability, Fitch said.
However, Princeton’s demographic and economic strength metrics were mixed. The city’s unemployment rate, educational attainment, and median household income (MHI) collectively performed at the 54th percentile of Fitch’s local government rating portfolio.
Despite the high MHI indexed to the median issuer, the midrange unemployment rate and educational attainment levels moderate the overall demographic and economic strength rating.
The city’s long-term liability burden was assessed as ‘Midrange.’ This includes liabilities to personal income, governmental revenue, and carrying costs to governmental expenditures. The assessment reflects a balance between the city’s strong revenue levels and the burden of long-term liabilities, Fitch said.
The upgrade was influenced by Fitch’s revised U.S. Public Finance Local Government Rating Criteria, which now incorporate a more detailed assessment of financial resilience and demographic metrics. Fitch said the criteria changes emphasize the importance of maintaining strong financial reserves and managing long-term liabilities effectively.
The Local Government Rating Model used by Fitch generates Model Implied Ratings, which quantify the issuer’s credit quality. For Princeton, the Model Implied Rating is “AA+” with a numerical value of 9.73, indicating a position at the higher end of the “AA+” rating scale. The model considers issuer-specific metrics and additional analytical factors, which can adjust the rating up or down by up to three notches.
Fitch said several factors could lead to a negative rating action, such as a sustained decline in general fund reserves below 7.5% of spending, weakening economic and demographic performance, or a significant increase in long-term liabilities. Conversely, continued population growth, improved economic metrics, and a reduction in long-term liabilities could result in a positive rating action.
The GO and CO bonds are direct obligations of the city, payable from ad valorem taxes and surplus revenues from the city’s waterworks and sewer system. Princeton plans additional borrowing later this year, which has been factored into the long-term liability assessment.