NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Romulus, Michigan's (the city) obligations as follows:
--$4.6 million limited tax general obligation (LTGO) capital improvement bonds, series 2006 at 'BBB+';
--$12.1 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 backed by a pledge of tax increment revenues collected within the development area.
KEY RATING DRIVERS
STABLE FINANCIAL POSITION: The city's financial operations have been stable for the past four fiscal years, which Fitch believes is important to offset effects of the statewide phase-out of the personal property tax and limited revenue growth. The city expects to add to general fund balance at the end of fiscal 2016.
LIMITED FINANCIAL FLEXIBILITY: Independent revenue-raising capacity is constrained by state-imposed property tax limitations, which, together with the city's extensive past expenditure cuts and continued property tax revenue contraction, creates limited budget elasticity.
WEAK LONG-TERM LIABILITY PROFILE: The city has elevated overall debt levels, a poorly funded pension plan, and a sizable unfunded liability related to other post-employment benefits (OPEB). Fixed costs are a moderate portion of spending.
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 weakness 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.
RATING SENSITIVITIES
BALANCED FINANCIAL OPERATIONS: Maintenance of unrestricted reserves at or close to current levels 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.
CREDIT PROFILE
Romulus is 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 23,900 has remained largely stable over the past decade.
STABLE FINANCIAL OPERATIONS DESPITE SLOW REVENUE GROWTH
Four years of financial stability brought the city's unrestricted reserve position from a low of $1.4 million (7.6% of spending) at fiscal year-end 2011, to a satisfactory $3.1 million (16% of spending) at fiscal year-end 2015. 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. Beginning in fiscal 2015, the city reopened several parks, and furlough days were reduced in fiscal 2015 and eliminated in fiscal 2016.
Property tax revenue comprised 40% of fiscal 2015 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 increase the millage rate. Additionally, as a heavily industrial city, the recent statewide phase-out of personal property tax has affected the city disproportionately and resulted in continued property tax revenue declines that are not offset by state formula funding.
The city's proposed fiscal 2016 budget shows continued property tax revenue declines and a modest fund balance appropriation. Based on current estimates, management expects to add roughly $2 million to fund balance due to positive budgetary variances, bringing the total general fund balance to approximately $5.7 million or about 30% of budgeted fiscal 2016 spending. Expenditures are currently tracking 7.3% below budget, much of it related to staffing and heath care changes. The fiscal 2017 budget is not yet available.
CONCENTRATED ECONOMY; DECLINING TAV
The city's TAV continues its prolonged decline. Fiscals 2016 and 2015 TAV decreased by 2.5% and 3.8%, respectively, caused by the statewide phase-out of the personal property tax. Declines are expected to continue at least over the near term, as the phase-out continues until 2023. In contrast, the city's SEV and real property assessed value (which are not affected by the personal property tax phase-out) increased by roughly 2% from fiscal 2015 to 2016. Tax collection rates continue to be low but stable.
A significant $26 million (78%) decline in General Motors' TAV in fiscal 2015 was related primarily to the personal property tax phase-out and which was partially offset by growth in other top taxpayer TAV, resulted in a slightly less concentrated tax base. DTE Energy and Delta Airlines are currently the top two taxpayers at a little over 5% of total TAV combined. The presence of the airport makes the city a desirable place for businesses to locate; Spirit Airlines is investing approximately $32 million to build a new hangar, with construction to begin in spring 2016. Further, a 365,000 square foot outlet mall is planned for the city with anchor tenants reportedly secured.
Wealth indicators in the city are below average, with per capita money income just 77% of the state and 70% of the national averages. The city's unemployment rate of 5.7% in December 2015 is well below past highs, but above state and national averages.
WEAK LONG-TERM LIABILITY PROFILE
Overall debt levels are high, at $4,663 per capita and 5.8% of the city's market value. Amortization is rapid, with 81% of principal retired within 10 years. The city plans to issue up to $12 million of debt for the 34th District Court, with a dedicated revenue source already implemented to fund the debt. The TIFA bonds continue to be self-supporting.
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's contribution consistently matches the actuarial requirement; however, using GASB 68 reporting, the ratio of assets-to-liabilities at Dec. 31, 2014 deteriorated to 42% from 44% the prior year, or approximately 37% from 40% using Fitch's 7% discount rate assumption. The plan's funding assumptions, including a high discount rate and rolling amortization, may make progress toward pension pre-funding hard to achieve - even if the city continues to make full actuarial contributions.
OPEB costs are high, but should moderate somewhat over the longer term following a recent healthcare buyout. The city's unfunded OPEB liability was an elevated $57.3 million or 3% of market value as of the June 30, 2013 valuation, although that was a decline from 4% at the June 30, 2011 valuation.
Total fixed costs for pensions, OPEB and debt service were a moderate 18% of total governmental spending in fiscal 2015.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published at the beginning of the second quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, Lumesis, IHS, and Zillow Group.
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000976
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000976
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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