Fitch Affirms Romulus, MI's LTGOs at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings for Romulus, Michigan's (the city) obligations as follows:

--$4.9 million limited tax general obligation (LTGO) capital improvement bonds, series 2006 at 'BBB+';

--$12.9 million LTGO recreation center bonds, series 2006 issued by Romulus Tax Increment Finance Authority (TIFA) at 'BBB+';

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

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are backed by the full faith and credit of the city and its ad valorem property tax pledge, subject to applicable constitutional, statutory and charter limitations. The TIFA bonds are additionally payable from the tax increment revenues collected within the development area.

KEY RATING DRIVERS

VULNERABLE FINANCIAL POSITION: Fitch believes the city's currently satisfactory unrestricted reserve position is vulnerable to the effects of both the statewide phase-out of personal property tax and generally stagnant-to-declining economic indicators. The implementation of a new fee at the city's district court will likely offset only a portion of recent revenue declines.

LIMITED FINANCIAL FLEXIBILITY: Independent revenue-raising capacity is constrained by state-imposed property tax limitations, which, compounded with the city's extensive past expenditure cuts and continued property tax revenue contraction, creates a very limited margin for error.

CONTINUED TAV DECLINES: Taxable assessed value (TAV) continues to decline, the result of the statewide personal property tax phase-out, despite positive trends in the city's housing market and state equalized value (SEV). This has added to the city's ongoing property tax revenue contraction. The phase-out has disproportionately affected heavily industrial communities in Michigan.

CONCENTRATED, INDUSTRIAL ECONOMY: The city's local economy is largely dominated by industrial and manufacturing entities, which is reflected in the city's concentrated tax base. City income and wealth levels are below the state and national averages.

WEAK LONG-TERM LIABILITY PROFILE: The city's moderate overall debt levels and rapid amortization are overshadowed by a poorly funded pension plan, a notable unfunded liability related to other post-employment benefits (OPEB), and a substantial backlog of deferred capital projects. Fixed costs are a moderate portion of spending, but are expected to continue an upward trend given limited economic growth prospects and increasing legacy costs.

RATING SENSITIVITIES

RESERVE MAINTENANCE: Maintenance of unrestricted reserves above the city's informal 10% target, which Fitch views as adequate, is critical to the preservation of the current rating and Outlook, given the vulnerabilities associated with the city's lack of both revenue and expenditure flexibility.

ECONOMIC STABILITY: Further economic deterioration, including any withdrawal of operations by General Motors (GM) or Delta Airlines, two of the city's largest taxpayers, would likely result in downward rating pressure.

CREDIT PROFILE

Romulus is a mature suburb of Detroit, located in the southwestern portion of Wayne County, and home to the Detroit Metropolitan Wayne County Airport (the airport). The city's 2014 population of 23,519 has remained largely stable over the past decade.

CURRENTLY SATISFACTORY, BUT VULNERABLE, FINANCIAL POSITION

Three years of financial stability brought the city's unrestricted reserve position from a low of $1.4 million (7.6% of spending) at fiscal yearend 2011 to a sound $3.4 million (19% of spending) at fiscal year-end 2014. Management has responded to a prolonged property tax revenue contraction by reducing expenditures through staffing cuts, park closures, furloughs, deferred capital projects, and minor concessions from labor units. Expenses in fiscal 2014 were 20% lower than peak fiscal 2008 general fund spending.

Property tax revenue comprised 43% of fiscal 2014 total general fund revenues and the city is currently operating at the maximum allowable millage rate under the Headlee Amendment, resulting in limited ability to independently raise revenues. Voters have been staunchly opposed to any referenda to raise the millage rate. Additionally, as a heavily industrial city, the recent statewide phase-out of personal property tax has disproportionately affected the city and resulted in continued property tax revenue declines not offset by state formula funding.

Given the highly constrained tax revenue environment and the magnitude of past cuts, which have left the city with little remaining expenditure flexibility, the city has been attempting to ramp up fine/forfeiture revenue to make up for budgetary shortfalls. However, an overly aggressive revenue assumption for fiscal 2015 has exacerbated a budgeted $422,000 fund balance draw, resulting in an estimated $809,000 draw. The missed budget assumption was the result of unexpected traffic officer understaffing and delays in the implementation of a new Funding Unit Fee, a per-ticket processing charge levied by the court on behalf of the city at the 34th District Court (which Romulus hosts and serves five communities) that was expected to generate an additional $1 million in revenue for the city. If the draw were to materialize as currently estimated, unrestricted reserves would decline to a still-satisfactory $2.4 million (12.2% of projected fiscal 2015 general fund spending).

The city's proposed fiscal 2016 budget shows continued property tax revenue declines and a modest fund balance appropriation. Fitch believes reserve levels provide a satisfactory financial cushion at the current rating level if fiscal 2015 and fiscal 2016 reserve draws materialize as expected. The city's assumption for fine/forfeiture revenue is slightly tempered from the fiscal 2015 budget, although Fitch still views the continued use of this line item to offset other revenue declines as aggressive and potentially unrealistic. However, the city's traffic officers are now fully staffed and the previously referenced fee has been implemented, which suggests that the city may come closer to reaching its proposed fine/forfeiture assumption in fiscal 2016.

SUBURB ANCHORED BY GM AND AIRPORT; DECLINING TAV

The city's taxable assessed valuation (TAV) continues its prolonged decline, with projected fiscal 2015 TAV nearly 47% below its fiscal 2006 peak. TAV declines in fiscals 2015 and 2016 have been caused by the statewide phase-out of personal property tax and are expected to continue over at least the near term as the phase-out continues. In fiscal 2015, the city experienced its first year since fiscal 2006 of organic growth in state equalized value and real property assessed value, which are not affected by the personal property tax phase-out. Tax collection rates continue to be low but are slowly improving.

The city's tax base is fairly concentrated, with a large GM engine plant comprising 3.6% of city TAV. GM has recently made large investments in the plant, which provides Fitch some comfort regarding GM's continued commitment to this location. The presence of the airport makes the city a desirable place for businesses to locate, and the city has several fairly large corporate developments in progress. In July 2015, the city expects ground to be broken on a 366,000 square foot outlet mall.

Wealth indicators in the city are below average, with per capita money income just 80% of the state and 73% of the national averages. The city's unemployment rate of 7.7% in January 2015 is well below past highs, but above state and national averages. Improvement is largely due to labor force declines, as employment growth has been modest in recent years following a prolonged recessionary decline. Additionally, city wealth levels continue to decline, with 2013 median household income down an aggregate 7.7% since 2009.

WEAK LONG-TERM LIABILITY PROFILE

Overall debt levels are moderate, at $3,844 per capita and 4.7% of the city's market value, and amortization is rapid, with 72% of principal retired within 10 years. Further debt issuance plans of up to $11.2 million over the next few years are not expected to have a material impact on the city's overall debt profile. However, the city's backlog of capital needs continues to grow following nearly a decade of deferrals; as a result, Fitch does not expect material declines in the city's direct debt burden. The TIFA bonds continue to be self-supporting.

Total fixed costs for pensions, OPEB and debt service are 20% of total governmental spending. Fitch expects fixed costs to continue on their upward trajectory given the size of the unfunded pension liability, the back-log of capital projects, and limited economic growth prospects.

The city is a member of the Michigan Municipal Employees' Retirement System (MERS, an AME plan) for police and fire. Those employees not in MERS participate in a defined contribution plan. The city consistently makes 100% of its actuarially required pension contributions; however, its portion of MERS is poorly funded at 44%, or approximately 40% using Fitch's estimated 7% discount rate assumption.

OPEB costs are high, but should moderate somewhat over the longer-term following a recent healthcare buyout. The city's unfunded OPEB liability was a high 3% of market value as of the June 30, 2013 valuation, but a decline from 4% at the June 30, 2011 valuation.

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=982936

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Contacts

Fitch Ratings
Primary Analyst
Brendan Scher, CFA
Associate Director
+1-212-908-0686
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
+1-212-908-9181
Committee Chairperson
or
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Brendan Scher, CFA
Associate Director
+1-212-908-0686
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Eric Friedman
Director
+1-212-908-9181
Committee Chairperson
or
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com