Fitch Downgrades Howell Township, MI's LTGOs to 'BBB'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--As part of its continuous surveillance effort, Fitch Ratings downgrades the following Howell Township, MI (the township) limited tax general obligation (LTGO) bonds:

--$2,950,000 general obligation limited tax bonds, series 2004, to 'BBB' from 'AA-';

--$7,875,000 special assessment limited tax bonds, series 2005, to 'BBB' from 'AA-';

--$1,590,000 special assessment limited tax bonds, series 2006, to 'BBB' from 'AA-';

--$7,825,000 special assessment limited tax bonds, series 2007, to 'BBB' from 'AA-'.

At this time, Fitch also assigns an implied unlimited tax general obligation rating of 'BBB+'.

The Rating Outlook is revised to Negative from Stable.

RATING RATIONALE:

--The downgrade to 'BBB' reflects the significant and rapid decline in financial flexibility due to general fund support for debt obligations that were anticipated to be paid from special assessments.

--The Negative Outlook reflects concerns that options to retain even modest financial flexibility will be limited given revenue limitations and the significant expenditure reductions already made.

--Past and expected declines in taxable value (TV) combined with a limited tax base are a concern as property tax revenue is 45% of general fund revenue.

--The township's tax and economic base is limited.

--An elevated debt burden which is partially mitigated through rapid principal amortization.

WHAT COULD TRIGGER A DOWNGRADE:

--Continued drains on reserves to fund debt service on special assessment bonds.

SECURITY:

The 2005, 2006 & 2007 special assessment bonds are secured by special assessments associated with various special assessment districts and also carry a limited tax general obligation pledge, payable from ad valorem taxes levied on all taxable property in the township subject to statutory and constitutional limitations. The 2004 bonds are limited tax general obligations.

CREDIT SUMMARY:

The downgrade to 'BBB' reflects Fitch's growing concern regarding general fund support for debt service that was intended to be repaid by special assessments. The township has the limited revenue raising options and has already drastically reduced expenditures in the general fund. Debt service was paid in fiscal 2011 from a loan from available general fund balance combined with available fund balance in the water and sewer (w/s) fund. Reserves will not be sufficient to cover debt service beyond the next two fiscal years at best.

The special assessment bonds provided financing for w/s infrastructure in anticipation of housing developments that did not occur due to the economic downturn. Management anticipated that these assessments would be sufficient to pay debt service on these obligations, which make up the bulk of the township's debt. These properties are now up for tax sale and due to the depressed housing market are not selling. As such the expected w/s special assessment revenues from these properties to pay debt service has not materialized.

The township entered fiscal 2011 with a strong unreserved general fund balance of $1.3 million or 188% of total spending after three consecutive years of surpluses. Management has shown a dedication to balanced operations by significantly cutting expenditures over 60% from the peak in fiscal 2007. Budget reduction combined with careful fiscal management bolstered general fund balances and added a significant layer of flexibility to the township's finances. Budget measures include reducing employee count, cutting back hours, and freezing salaries. The township continues to search for efficiencies and seeks to further reduce the fiscal 2012 budget as there are limited options available to increase revenues due to the millage cap. However, management has indicated that there is little room for further meaningful budget reductions.

The flexibility built up in the general fund is now being reversed by the need to cover $2.5 million in annual debt service (350% of fiscal 2011 general fund spending), most of which is for special assessment debt. Reserves in the w/s fund have also been sound and are now declining for the same reason. The township continues to pursue opportunities to raise revenues including a 2 mill rate increase over five years that was recently rejected by voters, additional rate increases on existing w/s customers, and the implementation of a dedicated debt service fee on parcels in the township that choose not to connect to the system.

Taxable values (TV) in the county saw sharp declines over the past two years with the largest decline of 12% occurring in fiscal 2011. The township expects further declines of 5% to 7% in fiscal 2012 and is budgeting for a decline of 15% to be conservative. Declines in TV are cause for concern as property tax revenue is the township's largest revenue source at approximately 45% of total general fund revenues and the township is already levying the maximum operating millage under the Headlee amendment. The township's tax base is somewhat limited magnifying property tax revenue concerns.

The township's overall debt burden is elevated at $7,112 per capita and 16.4% of market value, including the special assessment bonds. Principal amortization is above average with 66% of the total outstanding retired in 10 years. Pensions are provided through a defined contribution plan.

Located in Livingston County, Howell Township is located between Lansing and Detroit where the majority of its residents commute to work generally in the hi-tech, higher education, and health care sectors. Township data is unavailable; however, unemployment in the county was 10.2% in March which while lower than the state rate of 11% remains above the national rate of 9.2%. Data for the same month also shows a 1.6% increase in employment over the prior year in the county as well as a 1.6% contraction of the labor force. There is some sign of economic improvement as unemployment is down over 20% from the same month last year. Township management has indicated that while commercial and residential development remains at a standstill there has been some development on the industrial side. Wealth levels in the county are average with per capita income 111% of the state and 96% of the national averages.

Additional information is available at 'www.fitchratings.com'

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, LoanPerformance, Inc., IHS and Global Insight

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;

--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

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