Fitch Affirms Washtenaw Co, MI's LTGOs at 'AA+' / DTANs at 'F1+'; Outlook Stable

SANTIAGO, Chile--()--Fitch Ratings affirms its ratings on the following Washtenaw County, MI (the county) obligations:

--$16,900,000 capital improvement bonds, series 2006A at `AA+';

--$1,625,000 (Washtenaw County Building Authority, MI) outstanding building authority bonds, series 2002 at 'AA+';

--$11,500,000 taxable general obligation limited tax notes, series 2013, at 'F1+';

--Implied unlimited tax general obligation (ULTGO) pledge at 'AAA'.

The Rating Outlook is Stable.

SECURITY

The notes and bonds are limited tax general obligations (LTGOs), secured by the county's full faith and credit and ad valorem taxing power, subject to applicable charter, statutory, and constitutional limitations. The LTGO pledge constitutes a first-budget obligation of the general fund.

KEY RATING DRIVERS

PRUDENT MANAGEMENT: Management has prudent fund balance and multi-year planning policies and has carefully managed its operating budget. The county board of commissioners has adopted its first four-year budget and has augmented fund balance to its 20% target.

SOLID FINANCIAL PERFORMANCE: The county has a strong record of positive operating results. More recently, financial performance has been better than budget, resulting in sizable increases to fund balance levels.

STABLE ECONOMY; GOOD ECONOMIC INDICATORS: The local economy is anchored by the University of Michigan and has shown resiliency with unemployment rates consistently and notably below state and national averages. County wealth levels are above both state and national averages.

MANAGEABLE LONG-TERM LIABILITIES: Overall debt levels are average and payout is rapid. Long-term liabilities are prudently managed with full annual required contributions (ARC) payments for pension and other post-employment benefits (OPEB).

LTGO AND ULTGO RATING DISTINCTION: The long-term rating distinction between the ULTGO and LTGO ratings reflects limited revenue-raising flexibility, as the county is currently levying at its maximum operating levy limit.

LIMITED TAX PLEDGE DRIVES NOTES RATING: The 'F1+' rating reflects the strong credit quality of the county's LTGO pledge and sound coverage from delinquent tax revenues that additionally secure the notes.

RATING SENSITIVITIES

FINANCIAL FLEXIBILITY: The county's continued efforts to improve financial flexibility by building up fund balance may over time result in an LTGO rating on parity with the ULTGO.

CREDIT PROFILE

Washtenaw County is located in southeast Michigan about 40 miles west of Detroit. The county encompasses approximately 710 square miles with an estimated population of 354,240, up 2.7% since 2010.

SOLID FINANCIAL PERFORMANCE; PRUDENT MANAGEMENT

The county's financial performance has been consistently solid and stable through the recession. The year 2013 ended with a strong surplus of $3.9 million or 3.8% of spending, bringing fund balance to $20.7 million or 20.3% of spending. Positive operations in 2013 were driven by an unbudgeted gain in property taxes and state revenue and conservative budgeting of benefits spending.

Fitch considers as a credit positive the county's work to augment fund balance, having reached its new long-term policy target of 20% with 2013 performance ahead of projections. The county reports an interest in further augmenting fund balance to 30% over the long term.

The county has adopted its first four-year budget for 2014-17 which shows balanced operations and contains assumptions which Fitch believes are reasonable to conservative. Assumptions include low wage and benefits growth per recently negotiated 10-year contracts and a 1% increase in property taxes, the county's predominant source.

The county is currently at its tax levy limit but derives additional financial and budgetary flexibility from pay-as-you-go financing of its capital needs.

HIGHER EDUCATION DRIVES STABLE ECONOMY

Ann Arbor is the county seat and home to the University of Michigan, which anchors the county economy with over 35,000 educational and medical sector employees. The county's assessed value rose 2% for 2014, the second consecutive year of increase, suggesting a stabilization of the tax base after the cumulative 11% decline from 2008 to 2012. County unemployment is historically below average and was 5.2% in December 2013, in line with prior year and well below state (7.7%) and national (6.5%) averages.

County wealth levels are above average, with per capita income equal to 128% and 113% of the state and national averages, respectively, averages which do not fully reflect significant student population consumption. Additionally, the county's education levels are high, with 51% holding a bachelor's degree, compared with 28% for the nation.

MANAGEABLE LONG-TERM LIABILITIES

The county's overall debt is average at $3,343 per capita and 3.7% of market value due to significant overlapping school district debt. County debt amortizes rapidly with 81% retired within the next 10 years.

The county capital plans are manageable and are largely cash-funded. The county continues to contemplate a recreation center in downtown Ypsilanti, planning for which is ongoing and will be funded from the county's dedicated parks millages. The parks millage is renewable every 10 years and the county has a good history of voter support.

The county provides pension and OPEB through various single- and multiple-employer plans and prudently funds 100% of its ARCs. The single-employer plan is the largest of the county's pensions and reports a 64.2% funding ratio. Fitch estimates that the aggregate funding ratio for both plans, adjusted to a 7% investment ratio return, is low at 59%. Fitch notes as a credit positive the county's recent success in negotiating a defined contribution pension plan for new county employees which will provide more predictability to the county's legacy costs over the long run.

Carrying costs of debt service, pension, and OPEB were a moderate 16.9% of governmental (less capital) fund spending in 2013.

DELINQUENT TAX ANTICIPATION NOTES (DTANs)

The notes are secured by the general obligation limited tax pledge of the county in addition to the lien on the county's 2013 delinquent tax revolving fund. Receipts to the revolving fund are constituted in all delinquent 2012 real property taxes received after May 15, 2013; accrued interest on such amounts; all of the county property tax administration fees on such delinquent taxes once the expenses of borrowing have been paid; and any amounts that are received by the county from the county, the state and any taxing units within the county because of the uncollectibility of said funds.

Sizeable balances in the general fund and other substantial county balances available through inter-fund borrowing provide strong security to repay noteholders should the county fail to collect delinquent taxes promptly. Fitch notes as a credit positive the reduction in borrowing from prior years reflecting better current collections; the county anticipates annual borrowing this year of $10 million to $13 million, a notable decline from $18 million a year prior.

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

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'Rating U.S. Public Finance Short-Term Debt' (Dec. 9, 2013).

Applicable Criteria and Related Research:

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724680

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827765

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Contacts

Fitch Ratings
Primary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Bernhard Fischer
Director
+1-212-908-9167
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Stephen Friday
Associate Director
+1-212-908-0384
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Bernhard Fischer
Director
+1-212-908-9167
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com