Fitch Affirms Ottawa County, MI's GOs and IDR at 'AAA'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Ottawa County, Michigan (the county) ratings at 'AAA':

--$33.5 million limited tax general obligation (LTGO) bonds (listed by series below);

--Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are backed by the county's full faith and credit general obligation and ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.

KEY RATING DRIVERS

The 'AAA' LTGO rating and IDR reflect exceptionally strong gap-closing capacity including superior budgetary flexibility, ample reserves and a low long-term liability burden.

Economic Resource Base

Ottawa County is located on the western border of the coast of Lake Michigan on the southwestern section of Michigan's lower-peninsula. The population is currently 279,995 and has the fastest growing population in the state, increasing over 6% since the 2010 Census. Unemployment in the county is significantly lower than the state average.

Revenue Framework: 'aa' factor assessment

Fitch expects property tax and other revenue sources to increase above the rate of inflation based on ongoing economic development. The county has significant ability to raise revenues as the county is well below its maximum authorized levy under the state's Headlee limits.

Expenditure Framework: 'aa' factor assessment

The county's rate of expenditure growth is expected to be in line with revenue growth. Expenditure flexibility is strong, with low carrying costs for debt service, pension and other post-employment obligations.

Long-Term Liability Burden: 'aaa' factor assessment

The long-term liability burden is low compared with the county's economic base.

Operating Performance: 'aaa' factor assessment

Extremely strong gap-closing capacity reflects ample revenue-raising ability, strong expenditure flexibility and prudent budget controls. Management makes consistent efforts to build financial flexibility during times of economic recovery.

RATING SENSITIVITIES

Revenue Growth: The county has seen growth in the local tax base and has capacity to increase rates given the current margin below the maximum allowable operating millage. This capacity is an important factor in the 'aa' revenue framework rating assessment.

CREDIT PROFILE

The local economy has historically been dependent on manufacturing including automotive parts, office furniture and other durable goods. In recent years, the tax base has become more diverse due to growth in healthcare, education and food processing industries. County official reported a significant uptick in both residential and commercial economic development including a 50% increase in building permits since 2011. The county has seen a 25% increase in jobs since 2010 and a 20% increase in market property valuations reflecting a strong economic recovery after declines from 2008 through 2011.

Revenue Framework

The majority of the county's revenue is derived by property taxes, which account for approximately 70% of general fund revenue. Intergovernmental revenue and charge for services account for almost 15% each.

Revenue growth through 2014 exceeded the rate of inflation by a small margin, but Fitch expects the trend to improve based on recent growth in the local tax base. Michigan's Headlee tax cap limits property tax levy growth to the rate of inflation plus an allowance for new construction. Taxable values have increased by approximately 10% between 2014 and 2016 due to new development, reflecting a solid economic recovery. Management projects 3% growth in fiscal 2017 property taxes based on current trends.

The legal ability to independently increase revenues is significant. The county is currently under its maximum authorized levy and maintains 0.643 mills in unused taxing capacity, which would generate an additional $6.9 million in property tax revenue.

Expenditure Framework

The main expenditures items within the general fund are for general governmental services and public safety with each department accounting for more than 45% of the total budget.

The natural pace of spending growth will likely be in line with projected revenue growth. Over 40% of the county's costs are for employee salaries and benefits and 36% is for other services and charges, which includes a sizeable pass through expense to other governmental funds. Wages are expected to increase by 2% in fiscal 2017 for all employees, including those covered by collective bargaining units. Currently, the county has seven collective bargaining units that represent 40% of the total labor force, but four of the unions are in the process of decertifying.

Flexibility of main expenditures is ample given management's ability to manage its labor force. The county made large staffing cuts during the most recent recession but has since restored many essential positions. Carrying costs for debt service, pension and OPEB contributions are low at just under 7% of general fund expenditures in fiscal 2015.

Michigan became a 'right to work' state in 2012, which provides management greater flexibility to manage union contract negotiations including adjusting employee benefits. Management has been very proactive in managing these expenditures including making changes to health care plans and eliminating defined benefit pension plans by transitioning to a defined contribution pension plan, which is expected to save over $30 million over the next 30 years. The county also issued pension bonds to improve the plan's net assets to liability ratio.

Long-Term Liability Burden

The long-term liability burden is low, accounting for less than 10% of personal income. The majority of the liability consists of overlapping debt issued by other municipal entities including local school districts, cities and towns. The county's direct debt is minimal and future borrowing plan are limited.

The county participates in the state's multiple employer defined benefit plan, Michigan Employees Retirement System (MERS). As of December 2015 the plan's assets to liabilities ratio is solid at 76.8%, using a 7% rate of return after the county issued pension obligation bonds in 2014. The county closed its defined benefit plan in 2010 and transitioned to a defined contribution pension plan for all new employees.

Operating Performance

Fitch believes the county has ample financial resilience to address a moderate economic downturn. The Fitch Analytical Sensitivity Tool indicates that the county's general fund revenues could decline 1.3% in an economic downturn in which GDP declines by 1%. In the event of a modest revenue decline, the county has significant capacity to independently increase property taxes and make expenditure cuts. It has exceptionally strong gap-closing ability given the significant available general fund reserves. The county maintains a restricted stabilization fund within the general fund which was equal to 17.5% of expenditures at the end of fiscal 2015. The county also has access to fund outside of the general fund including $20.5 million in available fund balance in the delinquent tax revolving fund. The fund is used to make local governments as well as the county's tax levy whole and is replenished with delinquent tax collections including interest and penalties.

The county's finances remained very strong throughout the prior economic downturn driven by conservative budgeting practices and sound fiscal management. By policy, the county maintains unassigned general fund balances within 10% to 15% of expenditures. The county utilized reserves in fiscal 2014 and 2015 for one-time expenditures including transfers to the capital projects fund and for costs associated with converting to defined contribution pension plans. Fiscal 2016 resulted in an estimated $5.5 million increase in general fund balance. The large increase was a result of changing the fiscal year from Dec. 31 to Sept. 30 whereby the county collected a full year in taxes to cover nice months of expenditures. The fiscal 2017 budget is balanced with minimal use of reserves and no millage rate increase.

Fitch has affirmed the following LTGO bonds at 'AAA':

--$575,000 Ottawa County (MI) (Crockery Township Sewage Disposal System) GOLT tax sewage disposal bonds series 2004;

--$490,000 Ottawa County (MI) (Port Sheldon Township Sewer Improvements Project) GOLT sewage disposal bonds series 2002;

--$75,000 Ottawa County (MI) (West Central Ottawa Wastewater Treatment Plant Expansion Project) GOLT sewage disposal bonds series 2002;

--$32,425,000 Ottawa County (MI) GOLT water supply bonds series 2007.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015205

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015205

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Shannon McCue
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shannon McCue
Director
+1-212-908-0593
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Arlene Bohner
Senior Director
+1-212-908-0554
or
Committee Chairperson
Karen Krop
Senior Director
+1-212-908-0661
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com