NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following actions on Buena Vista Township, Michigan's (the township) bonds:
--$2.7 million limited tax general obligation (LTGO) bonds affirmed at 'BBB'.
In addition, Fitch downgrades the implied unlimited tax general obligation (ULTGO) rating to 'BBB' from 'BBB+'.
The Rating Outlook is revised to Stable from Negative.
The bonds are secured by tax increment revenues collected by the township's Downtown Development Authority. The township has also pledged its limited tax, full faith and credit as additional security, subject to applicable constitutional, statutory and charter tax rate limitations.
KEY RATING DRIVERS
STABLE OUTLOOK: Fitch believes that the pledge of tax increment revenue provides sufficient support to stabilize the LTGO rating at its current level.
ULTGO DOWNGRADE: The downgrade of the implied ULTGO rating is driven by the continued constraints on the township's financial profile.
CAREFUL BUDGET MANAGEMENT MINIMIZES APPEAL EFFECTS: The Outlook revision to Stable for the ULTGO rating reflects Fitch's view that the township's budgeting practices have made a large tax refund resulting from an appeal more manageable.
ADEQUATE RESERVES; SMALL BUDGET: The township's reserve position is adequate as a percent of general fund spending given the limitations on other measures of financial flexibility, but nominally low. Revenue-raising capacity is constrained by state-imposed property tax limitations, which, compounded with the township's small size, creates a very limited margin for error.
CONCENTRATED TAX BASE: The local economy is highly concentrated around Nexteer, an automotive parts supplier that recently won a large tax appeal.
WEAK ECONOMIC INDICATORS: Demographics are weak, characterized by declining population, below-average wealth levels, and high unemployment. The town's population and tax base are very small.
SOLID TAX INCREMENT COVERAGE: Coverage of maximum annual debt service (MADS) declined slightly in fiscal 2014 as a result of a separate successful tax appeal within the project area, although it remains solid. However, tax increment revenue is exposed to risks associated with high taxpayer concentration and very low incremental value as a percent of base-year assessed value (AV).
MANAGEABLE LONG-TERM LIABILITIES: Overall debt levels are moderately low. The township has affordable carrying costs.
MAINTENANCE OF RESERVES: Maintenance of balanced financial operations is critical to mitigating many of the township's credit risks, including its small size, concentrated tax base, and lack of revenue-raising flexibility.
STABLE COVERAGE: The LTGO rating is sensitive to material deterioration in tax increment revenue coverage.
The township is located in the northeast portion of Saginaw County, approximately 79 miles northeast of Lansing. The township's 2013 population of 8,403 represents a cumulative 19% decline from it 2000 population.
TAX REFUND PAYMENTS STRAIN ALREADY LIMITED FINANCIAL FLEXIBILITY
The township's fiscal 2013 general fund surplus of $319,000 was largely driven by a decision to keep a town manager position open throughout the fiscal year (which generated nearly $207,000 in cumulative savings). This decision, which Fitch views as an unsustainable budgeting practice, highlights the township's extremely constrained operating environment. The better-than-anticipated performance strengthened the township's unrestricted general fund reserves from 17.6% of general fund spending to $868,000 or 29.5% at fiscal year-end 2013.
Due to the dependence of several special revenue funds on transfers from the general fund, Fitch believes total governmental fund operations provide the best indication of the city's financial position. Fitch believes that the township's total governmental unrestricted fund balance levels at the end of fiscal 2013 of $886,000 (14.8% of total governmental spending) provide a modest cushion as they begin making tax refund payments to Nexteer. The company accounts for 19% of the township's tax base even after its AV was adjusted downward in fiscal 2010. Its appeal requires the township to make refund payments totaling $558,000 in equal installments in fiscal years 2014, 2015, and 2016. An 8.5% decline in township AV from fiscal 2014 to 2015 was related to a state-wide phase-out of personal property tax; Fitch expects most or all of the lost property tax levy to be made whole by the proceeds of an offsetting state-wide sales tax.
Management's current projections for fiscal 2014 show a $90,000 to $100,000 general fund operating surplus, despite budgeting for a modest deficit, even with the first of the three $66,000 general fund tax refund payments due that year and a full year of having a full-time town manager. Positive projected fiscal 2014 results are largely driven by greater than anticipated property tax collections and state-shared revenue, and lower than anticipated expenditures. Fitch views these projections with caution as the township is on a calendar fiscal year and actual results will not be available for some time.
The township's preliminary fiscal 2015 budget shows another modest operating deficit and the township is currently levying at its maximum operating tax rate under the Headlee limitation. However, given the township's conservative budgeting practices, careful expenditure management, and modest reserve levels, Fitch believes that the township will be able to weather the duration of the refunds through their final payment in fiscal 2016.
CONCENTRATED LOCAL ECONOMY; WEAK ECONOMIC INDICATORS
The local economy is significantly tied to the automotive industry given the presence of Nexteer. The company continues to grow, adding nearly 80 jobs over the past year and launching its initial public offering in November 2013.
Township wealth levels are well below average, with median household income equaling 60% and 55% of the state and national averages, respectively. The county's unemployment rate of 8.7% in July 2014 is comparable to the state average, although well above the national average of 6.5%. Depopulation and a weak local housing market have led the township to pursue an extensive home demolition program.
MANAGEABLE LONG-TERM OBLIGATIONS
Overall debt per capita is low at $1,758, although considered more moderate at 3.2% of market value. Amortization is slow with 35% of principal retired within 10 years. The township has no further issuance plans and capital needs are reported to be minimal.
Pensions are provided through the Michigan Municipal Employee's Retirement System (MERS), an agent multiple-employed defined benefit plan. The township consistently pays its full required contributions. When adjusted for Fitch's 7% discount rate, the township's portion of the plan was weak at 65.4% funded at fiscal year-end 2013. Fitch believes efforts to improve funding might result in increased pension payments. Other post-employment benefits (OPEB) are provided on a pay-go basis. Total carrying costs for debt service and retirement benefits are moderate at 15.3% of total governmental spending.
TAX INCREMENT REVENUES PROVIDE SOLID COVERAGE
Tax increment revenues continue to provide solid coverage, covering MADS 2.2x in fiscal 2014. MADS coverage declined from 2.6x in fiscal 2013 as a result of an AV loss related to a successful tax appeal by Duro-Last, the district's top taxpayer. Nexteer is not in the tax increment district. The cumulative effect on taxable captured value was less than anticipated. Tax increment coverage holds up well to a variety of stresses, with a 52% AV decline necessary to reach 1.0x MADS coverage.
Fitch expects tax increment revenues to remain adequate to repay the bonds, but solid coverage is offset by significant weakness surrounding the tax increment revenue stream. The top 10 taxpayers in the district account for a very high 51% of total AV, with Duro-Last representing 21%. The top 10 taxpayers account for a very high 83% of incremental value. Incremental value as a percent of base-year AV is very low at 136%, indicating a high degree of pledged revenue volatility for a change in AV. The downtown development district's size is considered moderate relative to other Fitch-rated tax increment districts at approximately 1,547 acres.
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).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria