Fitch Affirms East Lansing, MI GOs at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following East Lansing, Michigan (the city) bonds at 'AAA':

--$3.4 million unlimited tax general obligation (ULTGO) bonds series 1999, 2005, and 2009;

--$19 million limited tax general obligation (LTGO) bonds series 2001, 2001B, 2004, 2005, 2006, 2007A, 2007B, 2008, 2008A, 2008B, 2009, 2009A, 2009B, 2010A, and 2011A;

--$7.9 million LTGO East Lansing Building Authority bonds series 2000 and 2005;

--$1.3 million LTGO Michigan transportation fund (MTF) bonds series 2009.

The Rating Outlook is Stable.

SECURITY

The ULTGO bonds are payable from an unlimited ad valorem property tax.

The LTGO bonds are payable from an ad valorem property tax pledge subject to applicable charter, statutory, and constitutional limitations).

The building authority bonds are payable from cash rental payments from the city. These payments are backed by the city's LTGO pledge.

The MTF bonds carry both the city's LTGO pledge and a pledge of the city's Act 51 MTF receipts from the state.

KEY RATING DRIVERS

SOLID FINANCIAL POSITION; MODEST DRAWS EXPECTED: General fund operations are balanced and reserve levels are solid. Management intends to trim unrestricted general fund reserves for one-time uses bringing reserves to levels more in line with the city's sound 15% policy.

PRUDENT FINANCIAL MANAGEMENT: Management has demonstrated prudent financial stewardship utilizing conservative budgeting and extensive monitoring and forecasting procedures.

STABLE, ROBUST ECONOMY: East Lansing's advantageous location adjacent to the state capital and as home to Michigan State University (MSU) provides both abundant employment opportunities and economic stability. Following multiple years of mild declines, city taxable values posted growth in fiscal 2015.

MIXED DEBT/LONG-TERM LIABILITY PROFILE: Carrying costs for debt service and retiree benefits consume a high proportion of governmental spending. However, rapid debt amortization and pre-funding other post-employment benefits (OPEB) offset this concern. In addition, overall debt metrics are moderate.

LTGO ON PAR WITH ULTGO: The LTGO bonds are rated on par with the city's ULTGO rating on the basis of the city's solid reserve levels, general budgetary flexibility, and the recent overwhelming willingness of voters to approve new millages.

RATING SENSITIVITIES

STABLE CREDIT PROFILE: The rating is sensitive to shifts in fundamental credit characteristics including the city's solid reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

East Lansing is located in central Michigan, adjacent to the state capital, Lansing, and home to MSU. The university's 2014 enrollment was over 50,000 (a cumulative increase of 11% over the past decade) and it employs nearly 12,000 people. The city's 2014 population of 48,554 has remained relatively unchanged over the past decade.

SOLID FINANCIAL POSITION; MODERATE DRAWS EXPECTED

Financial operations in the city are characterized by conservative, forward-looking budgeting and careful cost management. The city has experienced consistent structural balance over six consecutive fiscal years, with a fund balance draw in fiscal 2014 related to the one-time, council-approved transfer to prefund the city's OPEB liability and support infrastructure improvements. City management expects to continue making similar unbudgeted draws in fiscals 2015 and 2016. Management expects to incrementally reduce unrestricted general fund reserves from 20.7% ($6.8 million) at fiscal year-end 2014 closer to about 15%, consistent with the city's fund balance policy. Fitch views the city's use of reserves to fund capital and prefund its OPEB liability while complying with its fund balance policy.

The city is heavily dependent on property tax and state shared revenues, at 49% and 19% of total general fund revenues, respectively. The city utilized its remaining millage rate flexibility under the Headlee cap to offset modest declines in taxable value between fiscal years 2012 and 2014. The city is now operating at the maximum allowable millage rate under the Headlee Amendment, resulting in limited flexibility for the city to independently raise revenues. Fitch believes that the recent overwhelming voter support of a 10-year library millage underscores a favorable political environment for raising tax revenues through voter approval. If the city were to go to the voters with a Headlee override, Fitch estimates it would generate about $2 million annually for the city.

However, recent tax base growth has created a more favorable revenue environment for the city. The city also retains a solid degree of expenditure flexibility, which further mitigates concerns related to the city's lack of revenue flexibility.

STABLE, ROBUST ECONOMY

The city's local economy benefits from the presence of MSU and its 50,085 enrolled students, as well as its proximity to a large state government presence in Lansing. The outsize presence of MSU's student body negatively skews per capita income levels and the individual poverty rate, which makes interpretation of these metrics ambiguous. However, the proportion of students eligible for free and reduced lunch within the coterminous East Lansing Public Schools is well below the state and national averages, indicating that city wealth levels may be above average. Residents are highly educated with 69% of the population achieving higher education versus 38% nationally.

City employment and labor force grew at a rapid year-over-year pace, reflecting similar growth in the region that outpaced the state and national averages. The city's November 2014 unemployment rate of 4.7% was lower than the respective state and national averages of 5.7% and 5.5%, but still higher than the county and Lansing-East Lansing MSA averages of 4.2% and 4.1%.

The city's tax base resumed growth in fiscal 2015, following multiple years of modest declines. City management projects 3% annual growth in state equalized value over the medium term, which Fitch views as reasonable given positive trends in the city's housing market and several large developments within city limits. The tax base is diverse with the top 10 taxpayers accounting for 9.2% of total taxable value.

MIXED DEBT PROFILE

Overall debt ratios are skewed by the sizable student population and the exclusion of MSU's significant tax-exempt property inventory: debt per capita is $2,141 but 5.4% of market value. Fitch believes that true debt levels most likely fall into the moderate category. Principal amortization is rapid with 77% repaid within 10 years and, with modest capital needs, Fitch expects debt ratios to decline.

The city participates in an agent multiple-employer defined benefit pension plan administered by the Michigan Municipal Employees' Retirement System (MERS). The city's portion of plan liabilities was significantly underfunded at an estimated 53% in 2014 (adjusting for Fitch's more conservative 7% return on investment assumption). However, the city consistently pays 100% of its actuarially required contributions (ARC).

The city's OPEB liability has been prudently managed in recent years, including frequent prefunding. As of Feb. 3, 2015, market value of assets in the city's OPEB reserve (administered by MERS) totaled $12.5 million. The city's unfunded actuarial liability from its most recent actuarial study (2010) was moderate at about 1.6% of market value, although this figure may also be inflated by the city's exempted land. The city expects to continue fully funding its pension ARC and prefunding its OPEB liability over the next several years, as allowed by the city's operating environment.

The city's carrying costs for debt, pension, and OPEB were a high 27% of 2014 total government spending, driven by rapid amortization and increasing MERS contributions. Fitch expects carrying costs to continue an upward trajectory over the short term, but plateau and decline over the longer term as recent benefit adjustments begin to affect the overall MERS liability.

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

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=979542

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Contacts

Fitch Ratings
Primary Analyst
Brendan Scher, CFA
Analyst
+1 212-908-0686
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Bernhard Fischer
Director
+1 212-908-9167
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Brendan Scher, CFA
Analyst
+1 212-908-0686
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Bernhard Fischer
Director
+1 212-908-9167
or
Committee Chairperson
Karen Ribble
Senior Director
+1 415-732-5611
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com