Fitch Affirms Marysville, MI's LTGO Bonds at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following city of Marysville, Michigan (the city) ratings:

--$3.2 million limited tax general obligation (LTGO) capital improvement bonds, series 2006, at 'AA-';

--$0.2 million LTGO revenue bonds, series 1993, at 'AA-';

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

The Rating Outlook is Stable.

SECURITY

The bonds are secured by the city's full faith and credit general obligation and its ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.

KEY RATING DRIVERS

ELEVATED AUTO CONCENTRATION: The local economy is small and highly concentrated in the auto industry, with the top 10 taxpayers representing approximately 45% of taxable value (TV).

STRONG RESERVE LEVELS: The city's prudent financial management has maintained high liquidity and fund balance levels, providing ample financial flexibility.

NOTEABLE TAX RATE CUSHION: The city maintains an adequate cushion under the statewide property tax cap.

HIGH DEBT; ELEVATED CARRYING COSTS: High overall debt is driven by overlapping school district borrowing. Carrying costs, including debt service and retiree benefit payments, constitute an elevated share of governmental fund spending.

NO RATING DISTINCTION: Fitch makes no rating distinction between the LTGO rating and the implied ULTGO rating due to the financial flexibility offered by the city's high reserve levels and significant tax cushion.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices and resultant high fund balance levels. A significant reduction in the city's financial cushion would lead to downward rating pressure. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The city is located on the St. Clair River, approximately 55 miles northeast of Detroit, just west of the U.S.-Canadian border. The city's 2013 population of 9,819 has grown modestly over the last decade.

AUTO-CENTERED ECONOMY

The regional economy remains anchored by the automotive industry and as a result taxable values have suffered and unemployment levels remain high. TV declined by 16% between fiscals 2009 and 2013, though losses have moderated as stabilized residential values soften recent commercial and industrial declines. Employment data for the city are unavailable. Laborforce contraction has aided in decreasing the county's unemployment rate to 8.4% in May 2014, well above the national average of 6.1%, from 9.7% the year prior. The recessionary high was more than 17% in 2009. Wealth levels in the city are slightly above state averages, but mixed relative to the nation.

There is significant tax base concentration, with the top 10 taxpayers representing 45% of TV. ZF Friedrichshafen (ZF), an axle manufacturer, is the largest at 15%. ZF's facility opened in 2010 and has been growing and running at capacity since then. Tax revenues from ZF currently do not go to the general fund, but are used to pay off a Local Development Finance Authority (LDFA) note. ZF successfully appealed a past tax bill, placing the LDFA into a $570,000 deficit to be paid principally in fiscal 2015 from designated reserves. ZF tax revenues are expected to revert to the general fund when the note is repaid, generating approximately $500,000 of additional operating revenue.

Other major taxpayers include a local ethanol plant and an electric transmission facility, each of which makes up more than 5% of the tax base. Fitch views this high level of concentration as a negative credit factor, and will monitor the performance of these companies as any downsizing or closure could have a material impact on the city's finances and overall credit profile.

HIGH FUND BALANCE LEVELS AND TAX RATE CUSHION PROVIDE FINANCIAL FLEXIBILITY

The city has consistently maintained high general fund balances, adding to fund balance in four of the last five fiscal years, with fiscal 2010 marking the sole draw during that time. The city has prudently managed expenditures to maintain balanced operations despite property tax declines and volatile state funding. Key expenditure cuts have included reductions in headcount through attrition and consolidation of services with other communities. The city anticipates balanced operations for fiscal 2014 and has budgeted similarly for fiscal 2015.

The city maintains a 2.911-mill margin under the statewide property tax cap, which would add 14% to total revenues if the city levied to the cap. While TV declines have reduced the monetary benefit associated with the tax rate cushion, the additional financial flexibility remains a positive rating factor. The city has acknowledged that the additional millage available may be utilized to support operations in the future, though recent TV stabilization may lessen this possibility.

ELEVATED DEBT AND CARRYING COSTS

Overall debt is very high at $7,076 per capita and 9.5% of market value, due to the city's school district debt. Debt service constitutes an affordable 4% of governmental fund expenditures. Direct debt is amortized at an above-average pace, with 62% of principal paid out within 10 years. The city has no borrowing plans for the near future.

The city has two single-employer pension plans - one for police and fire and a general plan for all other employees. The city fully funds the annual required contribution (ARC) for both plans. The city's general plan is funded at an estimated 73.5% based on the 7% investment rate of return used by Fitch; the city's police and fire plan has a funded ratio of 64.7% by the same measure. The funded ratios of both plans are projected to improve, as recent plan adjustments, including restrictions on cost of living adjustments (COLA), are factored into the liability.

The city's other post-employment benefits plan (OPEB) ARC is fully funded, but equals a high 10% of governmental fund expenditures. However, OPEB costs have declined with the implementation of a new health care plan and are likely to decline further as the plan is closed to employees hired after June 30, 2013. Total carrying costs, including debt service, pension ARC and OPEB contributions, constitute an elevated 23.5% of governmental fund spending.

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.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=839656

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Contacts

Fitch Ratings
Primary Analyst
George M. Stimola, +1 212-908-0770
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Friedman, +1 212-908-9181
Director
or
Committee Chairperson
Amy R. Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
George M. Stimola, +1 212-908-0770
Analyst
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Eric Friedman, +1 212-908-9181
Director
or
Committee Chairperson
Amy R. Laskey, +1 212-908-0568
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com