Fitch Affirms Canton, MI's GOs at 'AAA'; Outlook Negative

NEW YORK--()--Fitch Ratings affirms the following Charter Township of Canton, Michigan's (the township) ratings:

--Approximately $71.2 million in limited tax general obligation (LTGO) bonds, series 2003, 2004, 2005, 2006, and 2007, at 'AAA'.

--Implied unlimited tax general obligation at 'AAA'.

The Rating Outlook is Negative.

SECURITY

The LTGO bonds are a general obligation of the township, secured by its full faith and credit and the levy of ad valorem taxes subject to applicable constitutional, statutory and charter limitations.

KEY RATING DRIVERS

OUTLOOK CONSIDERATIONS: The Negative Outlook reflects the diminished financial reserves across the township's three main operating funds from previously high levels, and budgeted draw on fund balance in the current fiscal period.

FAVORABLE ECONOMIC PROFILE: The township continues to exhibit a strong underlying economic profile including above-average income levels, low unemployment, and a growing population.

MODERATE LONG-TERM LIABILITIES: Pension funding is on the low side, however, debt ratios are moderate and outstanding principal is rapidly repaid. Fitch views favorably prudent advance-funding of a portion of retiree health benefits.

STRONG MANAGERIAL PRACTICES: Management adheres to prudent and proactive policies and conservatively budgets.

SIGNIFICANT REVENUE RAISING FLEXIBILITY: There is no rating distinction between the ULTGO and LTGO ratings based primarily on the adequate revenue raising flexibility under the township's maximum operating limit.

RATING SENSITIVITY

RESOLUTION TO RECENT BUDGET SHORTFALLS: Financial reserves remain very solid, but have been weakened by the township's recently uneven operating performance. The inability to address budgetary challenges in fiscal 2013 and 2014 by returning operations to a state of fiscal balance will likely result in a downgrade.

CREDIT PROFILE

The township is located approximately 23 miles west of downtown Detroit in Wayne County. The township has experienced considerable population growth over the past decade to 90,173 in 2010, up 18% since 2000.

STRONG FINANCIAL POSITION

The township's financial flexibility is high across operating funds (general, police, and fire) with an adequate fund balance, down from previously high levels, and a good degree of revenue-raising flexibility.

A $3 million operating surplus (after transfers) in 2011 (equal to a sound 5.8% of spending) restored a portion of the combined $7 million planned draw on fund balance in 2009 and 2010. The unrestricted fund balance of $7.6 million in 2011 is equal to an adequate 14.4% of spending. The township recently formalized a fund balance policy reserving 15% of current year spending in each of its operating funds. Fire and police fund balances ($4.2 million or 7.6% of spending in 2011) are legally restricted to public safety operations and capital spending and not reflected in the unrestricted fund balance under GASB 54, understating the township's budgetary flexibility.

The 2012 budget included $3.9 million use of fund balance across operating funds, but management expects a lower net draw of approximately $500,000 largely due to an increase in real estate related fees and employee cost savings from reduction in overtime and position consolidations.

The township's 2013 budget included a $2 million use of fund balance across operating funds; however, the forecast does not reflect approximately $1.7 million in projected revenue from increased fees. The township has adopted out-year budgets since 2011; management deferred board acceptance of its 2014 budget from December 2012 pending resolution of union negotiations and now anticipates board acceptance in April.

SIGNIFICANT TAX RAISING CAPACITY

The recent string of budget deficits remain a concern, however, Fitch notes the township retains considerable revenue-raising flexibility under its statutory cap. The township can raise its tax rate by 1.49 mills, which would generate up to an additional $5 million annually (equal to 10% of 2011 operating fund revenues). Additionally, the township's fire and police millages are not subject to statutory caps.

STRONG LOCAL ECONOMY

Local unemployment was 3.5% in December 2012, well below county (11.4%), state (8.9%), and national (7.6%) averages. Wealth levels are high, with median household income at 170% of state and 157% of national averages. Major local employers remain stable, with Plymouth Canton Schools (2,300), the U.S. headquarters of Yazaki North America Corp., a manufacturer of automotive electrical and data components (1,103), and various retailers such as IKEA and Home Depot.

TAX BASE DECLINES MODERATE

Taxable assessed value has declined 17.7% since 2007 peak, and market value has declined 26.4%. Positively, the pace of declines has moderated, with small declines of 0.7% in 2012 and 1.4% in 2013. Management projects an approximate 2.5% increase for 2014, which Fitch views as reasonable given local real estate permitting fee activity.

MANAGEABLE LONG-TERM LIABILITIES

The township's overall debt levels are moderate at $2,507 per capita and 3.2% of market value. The township's debt profile benefits from a small amount of pay-as-you-go capital investment ($1.1 million or 2% of spending in 2011) as well as rapid payout (75% in ten years). Annual debt service cost in 2011 of $3 million was equal to a low 5.2% of operating fund spending.

The township's capital improvement plan for 2012-2017 anticipates $26.4 million in township costs over the coming six years with a manageable $2.1 million (12%) paid in bonds.

The township participates in an agent defined benefit pension plan as part of Michigan Employees' Retirement Systems (MERS) and a hybrid plan. The township has introduced lower legacy cost plans since 2009, a positive for its long-term liability profile. The defined benefit plan is underfunded at 64% (assuming a 7% investment return); positively, the township is making its full annual required contributions (ARC). Fitch also notes the township recently resolved negotiations with its general employees and clerical labor groups resulting in lower pension multipliers which should help control growth of the liability going forward. The township's retirement systems payments in 2011 represented a manageable 7.3% of operating funds spending.

The township has advance funded its OPEB liability with a $3.6 million balance held and administered by MERS. In 2011, the township contributed $400,000 to this reserve, thus funding 47% of its ARC ($2.2 million). The township continued this practice in 2012 with a $250,000 payment to this reserve. The township's unfunded actuarial liability represented less than 1% of 2012 market value.

The township's carrying cost for debt, pension, and OPEB was a manageable 16.6% of 2012 governmental (net of capital) fund spending.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst
Stephen Friday
Analyst
+1-212-908-0384
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Director
+1-212-908-0554
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Stephen Friday
Analyst
+1-212-908-0384
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Director
+1-212-908-0554
or
Committee Chairperson
Michael Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations
Elizabeth Fogerty
+1-212-908-0526
elizabeth.fogerty@fitchratings.com