NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Green Oak Charter Township, MI's limited tax general obligation bonds (LTGOs) as follows:
--$600,000 LTGO building authority bonds, series 2000 at 'AA-';
--415,000 LTGO sanitary sewer special assessment bonds, series 2001 at 'AA-';
--$6.5 million LTGO sanitary sewer special assessment bonds, series 2003 at 'AA-';
--$3.2 million LTGO water special assessment bonds series 2003 at 'AA-';
--$1.4 million LTGO sanitary sewer special assessment bonds, series 2004A at 'AA-';
-- Issuer Default Rating (IDR).
The Rating Outlook is Stable.
SECURITY
The LTGO bonds are general obligations of the township, which has pledged its full faith and credit and ad valorem pledge subject to applicable charter, statutory, and constitutional limits. The building authority LTGO bonds have an irrevocable pledge of cash rental payments paid by the township to the building authority.
The special assessment bonds are additionally payable from special assessments levied on properties affected by the capital improvements.
KEY RATING DRIVERS
The 'AA-' IDR and GO rating reflect the city's solid operating performance and strong financial resilience including ample available reserves. The ability to independently increase revenues is minimal; however, natural expenditure growth is expected to remain in line to marginally above revenues. The long-term liability burden is moderate but carrying costs are elevated.
Economic Resource Base
The township is located 14 miles north of Ann Arbor within Livingston County, MI and had a population of 18,504 in 2015. The township has seen a 5.9% increase in population growth since the 2010 Census.
Revenue Framework: 'bbb' factor assessment
Fitch expects revenue growth to approximate inflation based on recent and historical trends. Property tax growth is limited under Michigan's Headlee amendment. The township is operating at its maximum allowable millage rate and has little independent ability to increase revenues.
Expenditure Framework: 'aa' factor assessment
The natural pace of spending is expected to remain inline to marginally above revenue growth absent policy action. The township has adequate flexibility to reduce main expenditure items, although carrying costs for debt service, pension and other post-employment benefits (OPEB) are elevated.
Long-Term Liability Burden: 'aa' factor assessment
The long-term liability burden is moderate relative to the city's resource base.
Operating Performance: 'aaa' factor assessment
The township has exceptionally strong gap-closing capacity backed by ample available reserves and adequate ability to make expenditure reductions to maintain stable financial operations.
RATING SENSITIVITIES
Revenue vulnerability: The township's small size and limited independent revenue-raising ability result in some concern about the potential for unexpected changes in revenue.
CREDIT PROFILE
The township's tax base is primarily residential and in close proximity to employment opportunities in Ann Arbor. Livingston County's unemployment rate typically trends below the state of Michigan and the county has seen an increase in jobs since 2010, which reflects economic recovery. After moderate declines in taxable property (TV) values from 2008 through 2010, housing prices have improved and the township has seen a modest increase in home values and in residential development.
Revenue Framework
General fund revenues primarily come from state revenue sharing which accounts for approximately 45% while property taxes are about 25%.
Fitch expects that revenue growth prospects will approximate the rate of inflation based on current and historical trends. State revenue sharing is a constitutional obligation of the state and has been trending upward with average annual increases 2.5% over the past 10 years through 2016. Property taxes will likely increase at the rate of inflation given that the Headlee tax cap limits property tax levy growth to CPI plus an allowance for new construction. The township has seen modest improvement in taxable values (TV) from residential development but remains vulnerable to declining revenues in the event of future TV drops
The township has no independent legal ability to increase property tax revenue because it is currently operating at the maximum allowable millage rate under the Headlee amendment. Other locally-controlled sources, such as fees and charges for services, are relatively small. The township does have the ability to seek voter approval to increase taxes.
Expenditure Framework
The township provides general governmental services including road improvements, building and zoning and other service through the general fund. Fire and Police services are delivered through separate funds supported by their own property tax levies.
Fitch expects the natural pace of expenditure growth to remain in line to marginally above revenue growth. The biggest operating expense is employee salaries and benefits. The township did provide salary increases slightly over the rate of inflation in exchange for health care savings for fiscal 2017 and 2018.
The township has high carrying costs for pension, debt service and OPEB, which accounts for over 25% of general fund expenditures. The township's ability to manage main line expenditures is adequate because under the current labor environment, management has the ability to manage employee salary and benefits without the consent of the labor unions. Management has made changes to employee benefits including capping a portion of the township's annual pension contributions and passing on increases to the annual employee contributions. During the recent recession, the township did do a small layoff and minimized salary increases to ensure fiscal stability. In recent years, the township has replenished many of the positions and maintains some room to cut without major service reductions.
Long-Term Liability Burden
The long-term liability burden is moderate, equaling about 12% of personal income. The majority of the liability consists of overlapping debt (70% of total long-term liability) issued by other municipal entities including local school districts and Livingston County. Pension liabilities account for a modest 4% of the total long term liability. The township's direct debt is modest with moderate future borrowing plans. Debt amortization is rapid with 85% of principal paid within 10 years.
The township participates in the state's cost-sharing, agent multiple employer defined benefit pension plan, the Michigan Employees Retirement System (MERS). As of December 2015 the plan's assets to liabilities ratio was low at 49%, using a 7% rate of return although the township has been paying 100% of actuarially required contributions in recent years. The township has a defined contribution pension plan, the Green Oak Charter Township Group Pension plan which was closed to new employees in 2013 and annual contributions are minimal. Other OPEB are funded on a pay as you go basis with a limited number of eligible employees who will receive these benefits upon retirement. The unfunded liability for OPEB is minimal and accounts for 0.1% of personal income.
Operating Performance
Fitch believes that the city's financial resilience through an economic downturn would be very strong given its ample reserve margins and satisfactory budgetary flexibility. The Fitch Analytical Sensitivity Tool indicates that the city's general fund revenues could decline by 3.2% in an economic downturn in which GDP declines by 1%, based on historical results. Available operating reserves including the general fund, special police and fire funds available operating reserves were 80.9% of expenditures the end of fiscal 2016, which provides a significant financial cushion in the event of revenue declines. Additionally, the special police and fire funds maintain restricted reserves for specific public safety purposes with a combined restricted fund balances of $2.9 million (47% of operating expenditures) at the end of fiscal 2016. During the most recent recession, the township made expenditure reductions through a small layoff, adjusting employee salaries and by delaying capital projects. The township was able to add to general fund reserves and maintain significant financial resilience.
The township has maintained very stable financial operations throughout the most recent economic recession with ample reserves. Management has been proactive in maintaining strong financial resilience given the township's small budget and limited ability to independently increase revenues. The township had a small surpluses in the general fund, fire and special police funds in fiscal 2016 and anticipates a modest increase in reserves by year end fiscal 2017 based on current results.
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
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