NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Charter Township of Canton, Michigan ratings:
--Approximately $4.5 million in limited tax general obligation (LTGO) bonds, series 2004, 2006, and 2007, at 'AAA';
--Issuer Default Rating (IDR) at 'AAA'.
The Rating Outlook is Stable.
SECURITY
The LTGO bonds are a general obligation of the township, secured by its full faith and credit and the levy of ad valorem taxes subject to applicable constitutional, statutory and charter limitations.
KEY RATING DRIVERS
The 'AAA' rating reflects the township's ample revenue raising and expenditure flexibility, strong gap-closing capacity, conservative financial management practices, and low long-term liability burden.
Economic Resource Base
Canton Township is located approximately 23 miles west of downtown Detroit in Wayne County. The township's population has grown 18% since 2000 to 89,820 (estimated for 2016). Management expects population to continue to increase. The local economy is anchored by the auto industry and large national retailers. The resource base has driven population growth, positive wealth metrics, and a stable real estate market, which support the township's stable budgetary framework.
Revenue Framework: 'aaa' factor assessment
Fitch Ratings expects revenue performance to tack the rate of inflation. The township has ample legal ability to independently raise revenues.
Expenditure Framework: 'aa' factor assessment
The township's rate of expenditure growth is expected to be in line with revenue growth. Expenditure flexibility is solid, with moderate carrying costs for debt service, pension and other post-employment obligations.
Long-Term Liability Burden: 'aaa' factor assessment
The long-term liability burden including pension liabilities and overall debt is low relative to personal income and expected to remain at this level.
Operating Performance: 'aaa' factor assessment
Extremely strong gap-closing capacity reflects ample revenue-raising ability, and prudent budget controls. The township rapidly rebuilds reserves during times of economic recovery.
RATING SENSITIVITIES
Strong Fiscal Management: The rating is sensitive to changes in financial management practices that emphasize the maintenance of budgetary flexibility.
CREDIT PROFILE
Located midway between Detroit and Ann Arbor, home of the University of Michigan, township residents are employed throughout the greater southeast Michigan region. Wealth levels are well above the state and national averages. Unemployment is below the state and national rates.
Taxable assessed value (TAV) has exhibited modest, but steady year over year increases since 2011, reversing steep recessionary declines. TAV increased 2.8% in 2015 and management expects an additional 2.5% increase in 2016 based on county projections.
Revenue Framework
The township is mainly reliant on charges for fees and services, state-shared sales tax, and property tax revenues, totaling 28%, 23% and 18% general fund revenues, respectively. Other revenues come from diverse sources; including lease payments, cable TV royalties, and federal grants.
Historical revenue growth has trended above the level of inflation. Assessed property values have grown 7% since recessionary lows in 2012, but revenue gains have been capped by Michigan's Headlee amendment, which limits growth in the un-voted property tax levy to the rate of inflation plus new construction. Management attributes the township's revenue growth history to a steady stream of new residential construction and modest gains in state shared revenues.
The Headlee amendment also limits the total millage rate. The township's operating millage rate, at 1.366 mills per $1,000, is below its statutory maximum cap of 3.83 mills, leaving capacity for the township's elected leaders to adjust rates without voter approval an additional 2.46 mills, equal to approximately 27% of general fund revenues in 2015. Fitch considers this level of flexibility to position the township well to address revenue shortfalls in the event of a moderate economic downturn.
Expenditure Framework
Primary expenditures include general government activity equal to 31% of general fund expenditures. Recreational and cultural spending is unusually high, totaling about a third of general fund expenditures.
Fitch expects the pace of spending growth to be in line with to moderately above expected revenue growth in absence of policy action.
The township maintains solid flexibility to make expenditures reductions in its main expenditure items. Carrying costs for debt, pension, and other postemployment benefits (OPEB) are moderate at 19% of government spending. The township contributes 100% of actuarially required contributions for its pension plan; however, the plan assumes an optimistic 8% rate of return, which if not achieved, Fitch believes may cause pension costs to increase and could pressure the township's expenditure flexibility.
Management has identified several expenditure categories wherein they could actualize cost savings. These include adjustments to healthcare benefits, delay in capital investment, and salary-related savings found through furlough days and staffing attrition. Michigan is a right-to-work state and management has control of headcount and strikes are prohibited. Contracts, except for police and fire, are not subject to binding arbitration. Management does not expect the township to implement any of these cost saving measures in the near term. However, Fitch believes that the township will continue its commitment to utilizing pragmatic expenditure controls if faced with an economic downturn.
Long-Term Liability Burden
The township has a low long-term liability burden with debt plus Fitch-adjusted pension net liabilities totaling about 8% of personal income. Fitch expects the township's direct debt to remain low as the township has no new debt plans in the near term and maintains a rapid amortization schedule with 79% retired within the next 10 years.
Pension is provided through a multiple employer defined benefit plan - Municipal Employees' Retirement System (MERS). The plan reports an assets-to-liabilities ratio of 69%, assuming a 8% rate of return, as of Dec. 31, 2015. Using Fitch's more conservative 7% rate of return, the estimated assets-to-liabilities ratio is approximately 60%.
Operating Performance
Canton has exceptionally strong gap-closing capacity, driven by ample revenue raising ability and the willingness to cut expenditures, which has allowed them to manage through economic downturns while maintaining a high level of fundamental financial flexibility. This is evidenced by the use of strategic increases to the property tax levy at times of economic pressure while still remaining below the levy maximum prescribed by the Headlee Amendment.
Management has the ability to rapidly rebuild financial flexibility during times of economic recovery. The township has adjusted the ad valorem general fund tax rate in response to economic trends, recently reducing it from 2.366 mills to 1.366 mills. The decline in millage creates additional revenue raising flexibility for times of future economic distress. The expected revenue loss from the tax reduction are expected to be offset with organic growth in other revenue categories as well as from strategic implementation of new charges and fees for services. Conservative budget practices, including the use of expenditure cuts, have allowed management to grow robust unrestricted reserves. Fitch expects that Canton will continue to prioritize the maintenance of ample reserves and budget flexibility.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the 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
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