Fitch Downgrades Bay City, MI's LTGOs to 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings downgrades the following Bay City, Michigan (the city) obligations:

--$15,245,000 in outstanding limited tax general obligation bonds (LTGO), series 2004, 2004B, 2005, 2008A, 2008B, and 2010A to 'A+' from 'AA-'.

Additionally, Fitch downgrades the city's implied unlimited tax general obligation (ULTGO) rating to 'A+' from 'AA-'. The city has no outstanding ULTGO bonds.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

DOWNGRADE CONSIDERATIONS: The downgrade to 'A+' reflects continued economic weakness and related revenue pressures, a structural imbalance in recent years that has weakened overall financial flexibility, and continued increases in the city's fixed cost burden from prior elevated levels.

LIMITED REVENUE AND EXPENDITURE FLEXIBILITY: The tax rate is at the maximum allowable rate, limiting the city's revenue flexibility. Fixed costs are high, limiting expenditure flexibility.

STRONG RESERVES, COST CONTAINMENT EFFORTS: The city's financial profile benefits from good fund balances inclusive of resources outside the general fund and a measured approach to cost containment as evidenced by the city's recent public safety consolidation.

VULNERABLE ECONOMIC POSITION: Wealth levels are below and the unemployment rate is above state and national averages. Taxable values show some sign of stabilizing following significant declines in recent years adversely impacting revenue performance.

HIGH RETIREE LIABILITIES: The city has a manageable debt profile despite its limited taxable resources. However, liabilities with respect to pension and other-post employment benefit (OPEB) are considerable, and the cost of funding all long-term liabilities consumes an increasingly high share of the operating budget.

LTGO RATING ON PAR WITH IMPLIED ULTGO RATING: The LTGO bonds are rated on par with the implied ULTGO rating due to the strength of the city's general fund and non-general fund reserves.

RATING SENSITIVITIES

NEGATIVE FINANCIAL DEVELOPMENTS: Further material reductions in fund balance may differentiate the city's LTGO rating from its implied ULTGO rating.

CREDIT PROFILE

Bay City is the county seat of Bay County and located on the Saginaw River, 112 miles north of Detroit and 95 miles east of Lansing, the state capital. The city experienced a 5% population decline in the last Census to 34,424.

DIMINISHED RESERVE POSITION

In 2013 the general fund unrestricted fund balance stood at $4.3 million or 22.1% of spending. The fund balance was reduced by $1.9 million, a high 9.6% of spending, in part due to the implementation of a new public safety model expected to yield approximately $1 million in annual recurring savings going forward. The fiscal 2014 budget contained a $1.4 million use of fund balance, which the city expects will be closer to $974,000. Fitch estimates that the negative results would leave the city with approximately 18% unrestricted fund balance, above the city's 15% policy target but notably lower than the level of reserves maintained historically (generally, 25% to 30%).

Favorably the fiscal 2015 budget is balanced without use of fund balance, but Fitch does not expect any material improvement in the city's reserve position in the foreseeable future. Fitch notes that the city has additional resources outside of the general fund, conferring non-recurring financial flexibility which is an important consideration in the rating of the LTGO bonds on par with the ULTGOs.

OPERATING CONSTRAINTS

Property taxes represent 50% of general fund revenues, but the city is levying the maximum permissible property tax under state statute, which has resulted in property tax revenue losses as taxable value has declined an aggregate 29.3% since 2008. Importantly, the city's taxable value appears to have bottomed out, with a very modest 0.2% decline for 2015. The first phase of the Uptown at River's Edge project, a $150 million mixed-use development, is nearing completion; however, tax base increases will be captured for tax increment debt repayment, limiting upside for general use property taxes.

On the expenditure side actual spending on pension, OPEB, and debt service represented a considerable claim on city resources in fiscal 2013 at 40.3% of governmental expenditures, up from 28.6% in 2009. Fixed costs remain high taking into consideration the city is making pension payments that are greater that the actuarial required contribution (ARC) and pre-funding a portion of its substantial OPEB liability.

HIGH RETIREE LIABILITIES

The city's most recent reported OPEB liability is considerable at $101.6 million or more 9% of market value. The city is forward-funding a portion of its OPEB liability, spending approximately $1 million above the ARC in fiscal 2013. The city estimated the current balance of the OPEB trust at approximately $10 million. The city's 2015 budget increases the annual trust contribution to approximately $1.5 million.

The city participates in a closed state-administered agent defined benefit (DB) plan, an open public safety single-employer DB plan, and a defined contribution plan. The DB plans are underfunded, most recently reporting an estimated 61% and 68% funded ratios for its open public safety workers and closed municipal workers plans, respectively. Using Fitch's more conservative 7% rate-of-return assumption, the plans are estimated at 58% and 62% funded. Similar to its OPEB liability the city is prudently contributing more than the ARC for the state-administered plan, which should help to elevate its funded ratio.

The city's most recent union negotiations resulted in lowered pension benefit multipliers for new hires and eliminate future cost of living adjustments. While these changes do not materially impact the city's pension burden in the near term, they should help create a more sustainable pension scenario for the city over time.

BELOW AVERAGE WEALTH LEVELS

The city's employment base is supported by government and medical employers, with McLaren Bay Region (McLaren, 1,839 employees), Bay City Public Schools (900), and Bay County (500) representing the top three city employers. Since 2009 General Motors has invested $185 million in its Powertrain facility in the city, all of which is subject to a 50-year property tax abatement, and employed a total of 374 people in 2013. Dow Corning is expected to take occupancy of the Uptown at River's Edge project in August, bringing an estimated 450 jobs. Further job growth is anticipated related to McLaren's proposed 9.5 acre medical center as part of phase two site development.

Unemployment has moderated somewhat to 8.3% in April 2014 from the prior year (9.6%), with an increase in employment well outpacing increases in the labor force. This rate remains above the state (7.3%) and national (5.9%) averages. Median household income is only 68% and 74% of state and national averages, and the poverty rate is 1.5 times the national average. Current tax collections are weak at between 91%-93%, but the county makes the city whole and the city has not experienced extensive chargebacks.

MANAGEABLE DEBT PROFILE

Overall debt is low at $1,169 per capita but more moderate at 3.7% of full market value, underlining the city's weaker market value (at roughly $32,000 per capita). The city's debt amortizes rapidly, with approximately 87% of debt retired in 10 years. Debt service represents a low 7.1% of 2013 governmental fund spending. The city's 2014-19 capital plan anticipates $61 million in capital improvements, largely for enterprise funds with tax-supported plans being largely grant funded; only 7% of the plan is expected to be debt funded.

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, and IHS Global Insight.

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:

U.S. Local Government Tax-Supported Rating Criteria

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

Tax-Supported Rating Considerations for 2010

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=500988

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=839876

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Contacts

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

Sharing

Contacts

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