NEW YORK--()--Fitch Ratings downgrades and withdraws its rating on the following outstanding St. Ignace, Michigan (the city) general obligation (GO) bonds:
--$250,000 (Recreation Center Project) GO unlimited tax bonds series 1998 (matures 11/1/13) to 'BB' from 'BBB-'.
The Rating Outlook is Negative.
The bonds are secured by the city's full faith and credit and unlimited taxing power.
KEY RATING DRIVERS
WEAK FINANCIAL PERFORMANCE: The downgrade to 'BB' from 'BBB-' reflects the city's worse-than-expected financial performance in 2011 and continued draws on cash outside the general fund, further pressuring the city's already distressed financial profile. The downgrade also reflects Fitch's opinion that financial monitoring tools are weak leaving the city unable to present its interim budget performance and liquidity position in a robust manner.
OUTLOOK CONSIDERATIONS: The city has made adjustments to its revenue and expenditure profile over the past year. However, the Negative Outlook reflects Fitch's belief that recent adjustments may not be sufficient to stabilize the city's financial position and that further budget adjustments will be difficult for the city to realize because of the city's limited revenue raising capacity and challenges facing the city in implementing the draconian cuts contemplated for the 2013 budget.
WITHDRAW FOR INFORMATION LIMITATIONS: Although the level of ongoing information available is insufficient for Fitch to continue to properly assess the city's credit quality, Fitch believes that the 'BB' rating most accurately reflects the city's current credit position based on the limited available information.
SMALL, TOURISM-BASED ECONOMY: The city's location as the gateway to the Upper Peninsula, with ferry service to Mackinac Island, underpins the tourism-based economy. Wide swings in monthly unemployment underscore the seasonal nature of the attractions.
ABOVE-AVERAGE DEBT BURDEN: Overall debt burden is elevated, at 6.3% of market value. Payout for general fund debt is slow with only 36% scheduled for retirement in 10 years. Future borrowing plans are modest.
SMALL, TOURISM-BASED ECONOMY
St. Ignace is a relatively small city, with a year-round population of 2,452, although officials report that the population swells to approximately 30,000 during the summer months. The city benefits from its location on the north side of the Mackinac Bridge, which connects the Lower and Upper Peninsulas in Michigan. Proximity to Mackinac Island adds to the tourist allure. Full market value of the city's tax base is $183 million, down 18% from its peak in 2007.
The seasonal nature of the economy is evident in the monthly unemployment trends, which show below average rates May through October, and well above average rates for the remaining months of the year. Year-over-year analysis shows little recessionary impact on summer unemployment rates; winter rates ranged from about 28% at the height of the downturn in winter, 2010, versus roughly 22% in winter 2008.
Per capita income for year-round residents is 85% of the state and 79% of the U.S., reflecting the rural area, limited service-based economy, high seasonal unemployment, and higher than average proportion of retired residents. The individual poverty rate is approximately a third of the state's rate.
CONTINUED FISCAL CHALLENGES
After several years of challenged financial operations, the city's general fund carried a scant unreserved general fund balance at the end of 2010 of $62,660 or 3.3% of $1.7 million in general fund spending. The city's finances remain challenged with an operating deficit in 2011 which was worse than projected. The city was able to boost its unrestricted general fund balance to 10% of spending through a transfer in of approximately $260,000 from the city's capital improvement trust capital project fund. Without this transfer, the city would have ended fiscal 2011 with a general fund deficit.
For 2012, management reports having reduced expenditures by approximately $120,000, including the elimination of two fulltime positions and various operational savings, and raised revenue. Fitch notes that the city raised its millage to its legal maximum, reportedly generating approximately $72,000 in 2012 as well as enacting a franchise fee believed to generate approximately $25,000 annually.
The city is attempting to decrease the reliance of other funds on the general fund by raising water and sewer fees and non-general fund millages. Management projects positive operations for 2012; however, Fitch views these projections skeptically due to the city's history of inconsistent financial operating and reporting practices.
Management anticipates continued cost reductions in 2013, though Fitch believes that various public safety adjustments may be challenging for the city to realize. The city anticipates requesting a 2.0 mill public safety millage in May 2013, representing approximately $150,000 annually or 7.5% of 2012 budgeted expenditures. Fitch believes prospects for passage of the new millage are uncertain, as voters have shown little support in the past and most recently voted down a similar measure in August 2011.
PRONOUNCED LIQUIDITY CONCERNS
Liquidity strain is evident in the depleted cash position of the general fund, which at the end of 2011 reported a scant $12,000 (0.6% of 2011 spending or two days of operations). Additionally, the city tapped a substantial portion of its internally borrowable resources in 2011 to prop up its general fund, depleting an important source of the city's liquidity.
Management reports that current general fund cash balance is approximately $343,000 (approximately 50 days of operations), the high point in the city's annual cash flows. The city reports an additional cash balance of $215,000 in internal borrowable resources. Fitch believes that the information management has provided may not represent the city's current cash position given substantial adjustments that the city's auditor has made to the city's financials in the past. City audits include material weaknesses in the areas of financial statement production, material audit adjustments, and timely cash reconciliation.
Fitch notes a liability of 'checks issued in excess of cash' on the balance sheet, amounting to $5,000 across governmental funds in fiscal 2011, down from $50,000 in 2010. Officials report the purchase of new software to help them track cash flow as well as the hiring of an accounting firm to aid in cash reconciliation. The efficacy these measures may have is unknown. No cash flow borrowing is planned.
ABOVE AVERAGE DEBT BURDEN
The city's debt burden is high at 6.9% of market value including overlapping county and school debt. Much of the city's debt is enterprise-related, but sewer-related debt cannot be considered entirely self-supporting due to reliance upon the general fund for support. Officials have implemented phased utility rate hikes, which should improve the enterprise revenue stream and may relieve pressure on the general fund. Debt service represents an average burden on the operating budget, claiming almost 12% of general, debt service and special revenue fund spending in 2011. No further borrowing is planned.
St. Ignace participates in the Municipal Employees Retirement System of Michigan (MERS), which is a state-run agent multiple-employer plan. The city consistently funds its annual required contribution (ARC), which represented 10.3% of operating fund spending in fiscal 2011, and the plan was 72% funded as of year-end 2010. Using Fitch's more conservative 7% discount rate assumption, funding drops to 65%.
Other post-employment benefits (OPEB) are funded on a pay-go basis, with payments accounting for roughly 2.6% of spending. The unfunded accrued liability is equivalent to a moderate 1.2% of market value. The city recently changed the levels of health care provided to retirees, in an effort to limit its future OPEB liability.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria