Fitch Affirms Chesterfield Township, MI GOs at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Charter Township of Chesterfield, Michigan (the township) ratings at 'AA-':

--$1.1 million capital improvement limited tax general obligation (LTGO) bonds, series 2007;

--Issuer Default Rating (IDR).

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are backed by the full faith and credit of the township and its ad valorem property tax pledge, subject to applicable constitutional, statutory and charter limitations.

KEY RATING DRIVERS

The 'AA-' rating reflects the township's moderate control over revenues with slow revenue growth. The township also has adequate control over expenditures and a moderate long-term liability burden. Fitch believes that the district's ample reserves would remain exceptionally strong in a moderate economic downturn stress scenario.

Economic Resource Base

The Charter Township of Chesterfield is located approximately 20 miles north of downtown Detroit on Interstate 94. The township's 2015 population of 44,699 marks a cumulative 3% increase over 2010 figures.

Revenue Framework: 'bbb' factor assessment

Fitch expects the township's revenue to grow at a rate in line with inflation, and the township has moderate independent legal ability to raise revenue relative to its revenue volatility.

Expenditure Framework: 'aa' factor assessment

The township's expenditures are likely to increase at a rate modestly above revenue growth. Flexibility is adequate, with moderate carrying costs for debt and other long-term liabilities.

Long-Term Liability Burden: 'aa' factor assessment

The township's long-term liability burden, including direct pension liabilities and overall debt, is moderate relative to personal income.

Operating Performance: 'aaa' factor assessment

The township has exceptionally strong gap closing capacity, mostly due to very large available fund balance and low revenue volatility, to manage through an economic downturn.

RATING SENSITIVITIES

Revenue Expectations: The rating is sensitive to changes in Fitch's expectations for revenue growth in line with inflation, with growth above CPI potentially putting upward pressure on the revenue framework factor assessment.

CREDIT PROFILE

The township is largely residential in nature and about 50% built out, with some new growth underway. The township's assessed value has posted steady, albeit modest, gains over the past several years following four years of steep declines. Wealth levels for township residents are slightly above state and national averages.

Revenue Framework

The township's revenue across its four operating funds comes largely from property taxes, which made up 64% of FY 2015 operating fund revenue. The remainder is comprised of the township's share of the statewide sales tax (17%) and charges for services (10%).

Prospects for natural revenue growth are slow, given relatively modest population growth and stable economic activity. Fitch believes that future revenue growth is likely to be slightly higher than historical norms, in line with CPI, but below GDP growth due to new development projects underway. The township projects property tax revenue to grow between 3% and 5% based in part on the new development and for the township's share of the state sales tax to grow in line with its slow population growth.

The township has moderate ability to legally raise revenue independently relative to its low revenue volatility. While the township is constrained by state-imposed property tax limitations under the Headlee Amendment, it can increase some of its locally controlled charges for services and maintains the ability to impose a 1% administrative fee on its property tax levy, which it collected between FY 2009 and FY 2015.

Expenditure Framework

The township's expenditures across its operating funds are largely driven by public safety (approximately 62% of FY 2015 general fund expenditures) and general governmental administration (around 26%). The remainder is comprised of public works, culture and recreational spending, capital outlay, and debt service.

The township's collective bargaining agreements expire at the end of 2017 and have contained no salary increases for the last eight years, so Fitch expects that natural spending growth will be slightly above natural revenue growth as the township may provide some cost of living adjustments approximating inflation going forward.

The township maintains adequate flexibility of its main expenditure items. The township's carrying costs, including pre-funding its OPEB obligations, are approximately 20% of governmental expenditures, and management maintains some control over headcount. In addition, management maintains flexibility in its ability to delay spending on capital projects and purchases, which comprised around 4% of FY 2015 operating fund expenditures.

Long-Term Liability Burden

The township's long-term liability burden is moderate, with overall debt and direct pension liabilities at approximately 14% of personal income. The majority of the township's liability burden is comprised of overlapping debt from various school districts that serve the township (approximately 82% of the township's FY 2015 liability burden). Direct debt totals only 10% of the burden. The township does not have debt plans in the near future.

The township participates in the Municipal Employees' Retirement System of Michigan (MERS), which is an agent multiple-employer defined benefit pension system. Fitch calculates the ratio of assets to liabilities to be about 68% assuming a 7% discount rate.

Operating Performance

The township maintains exceptionally strong gap closing capacity to address a moderate economic downturn. Given the township's limited inherent budget flexibility, low revenue volatility, and large available reserve levels (equal to almost 100% of spending) in its four operating funds, Fitch believes the township's reserves would remain well above the 'aaa' assessment level throughout an economic cycle.

The township has made consistent efforts to maintain a high level of available reserves in the recent economic recovery. However, an operating deficit in the police department fund has been eroding that fund's restricted reserves for several years, and without resolution may require the township to either utilize unrestricted reserves or seek voter approval for an increase in the police department tax rate. Given the township's robust reserve levels, historically very strong performance within the other operating funds, Fitch believes that the township is well positioned to either absorb or resolve the fund's deficit spending over the near to medium term.

For FY 2016, management expects operational surpluses in the general fund and the fire and fire equipment funds, partially offset by an approximately $1 million deficit in the police fund that will be covered by a transfer from the general fund. The township will also use $1.5 million of FY 2015 general fund reserves to contribute to its irrevocable OPEB trust fund, which had a reported 60.2% funding ratio at the end of FY 2014.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015577

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015577

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Matthew Wong
Director
+1-212-908-0548
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 Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Matthew Wong
Director
+1-212-908-0548
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 Ribble
Senior Director
+1-415-732-5611
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com