NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Buena Vista Township, Michigan ratings at 'BBB':
-- $2.7 million capital improvement limited tax general obligation (LTGO) bonds;
-- Issuer Default Rating (IDR).
The Rating Outlook is Stable.
SECURITY
The bonds are payable from tax increment revenues collected by the township's Downtown Development Authority. The township has also pledged its limited tax, full faith and credit as additional security, subject to applicable constitutional, statutory and charter tax rate limitations; this serves as the basis for the rating.
KEY RATING DRIVERS
The 'BBB' rating reflects the township's weak revenue framework as well as Fitch's assessment that the township is poorly positioned to address cyclical downturns. This is somewhat tempered by solid expenditure flexibility and a moderate long-term liability burden.
Economic Resource Base
The township is located in the northeast portion of Saginaw County, approximately 79 miles northeast of Lansing. The township's 2015 population of 8,239 represents a cumulative 5% decline from it 2010 population; depopulation and a weak local housing market have led the township to pursue an extensive home demolition program. The local economy is significantly tied to the automotive industry.
Revenue Framework: 'bb' factor assessment
Fitch expects that revenue will continue to decline. The township has limited revenue raising flexibility.
Expenditure Framework: 'a' factor assessment
The natural pace of expenditure growth is well above that of declining revenue, requiring ongoing budget management. The township has solid expenditure flexibility.
Long-Term Liability Burden: 'aa' factor assessment
The township's long-term liability burden is moderate in relation to personal income.
Operating Performance: 'bbb' factor assessment
The township has limited gap-closing capacity, with weak revenue controls. Fitch expects that the township's available reserves could decline to negative levels in a moderate economic downturn.
RATING SENSITIVITIES
Reserve Maintenance: The 'BBB' rating is sensitive to the failure to use expenditure control tools to recover financial flexibility, which could result in a downgrade.
Improved Revenue Performance: The 'BBB' rating is also sensitive to improved expectations for revenue growth prospects, which could result in an improvement in Fitch's revenue framework rating assessment.
CREDIT PROFILE
Nexteer, an automotive parts supplier, is the largest property taxpayer at about 8%. DuroLast, another automotive company, makes up 2.5% of the tax base and is located in the tax increment district. DuroLast reportedly recently added a large piece of equipment that will expand its manufacturing capacity, and Nexteer has been expanding employment in recent years.
Township wealth levels are well below average, with median household income significantly below state and national averages. Historically, Saginaw County's unemployment rate is comparable to the state average, although well above the national rate.
Revenue Framework
The township's operating funds (general, fire, and police fund) revenue comes from several sources, including property taxes, which made up 50% of FY 2015 revenue. The remainder is comprised of the township's share of the statewide sales tax (15%), charges for services (14%), and other revenue sources.
Historical revenue performance and recent trends suggest the potential for continued declines, although future revenue trends should be less negative than the ten-year compound annual growth rate (-2%), which includes the state-wide phase-out of the personal property tax that occurred from 2013 to 2014 and a tax settlement with its largest taxpayer (Nexteer). The personal property tax has been effectively replaced by the proceeds of an offsetting state-wide sales tax. The township does not expect any growth from state or local sources and the revenue stream carries the risk of declines in state revenue sharing.
Fitch views the township's independent legal ability to raise revenues to be limited as it is currently levying at its maximum operating tax rate under the Headlee limitation.
Expenditure Framework
The township's expenditures across its operating funds are largely driven by public safety (approximately 55% of FY 2015 operating fund expenditures). The remainder is comprised of public works (14%), recreation and culture (14%), and debt service (7%).
Fitch expects that natural spending growth will be well above natural revenue growth. The township is currently negotiating 2 of its 3 collective bargaining agreements and one other expires this month. With the potential for salary increases approximating CPI growth to cover cost of living adjustments, the rate of expenditure growth should exceed the flat to declining revenue trend.
The township maintains adequate flexibility of its main expenditure items. The township's carrying costs are approximately 16% of governmental expenditures and management maintains some control over managing headcount, with the ability to reduce expenditures through layoffs. The township is also considering moving its fire department from full-time to "paid-on-call", which may reduce ongoing costs.
Long-Term Liability Burden
The township's long-term liability burden is moderate, with debt and pension liabilities at approximately 11% of personal income. The majority of the township's liability burden is comprised of direct debt (approximately 54% of the township's FY 2015 liability burden), with pensions representing the bulk of the remainder. The township does not have debt issuance 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 63% assuming a 7% discount rate
Operating Performance
The township has limited gap closing capacity to address a moderate economic downturn. Given the township's midrange inherent budget flexibility and comparatively high revenue volatility (even taking into account the fact that the historical volatility figure is likely overstated due to impact of the personal property tax phase-out), Fitch believes that in a moderate downturn, operating fund financial operations could become distressed to the point that available reserves reach negative levels as they did in FY 2011. Fitch notes that a large portion of available operating fund balance includes a receivable from the city's sewer fund.
The township has made consistent efforts in support of financial flexibility. The township has not deferred required spending and has improved operating fund available reserve levels from slightly negative levels in FY 2011 to over 16% of expenditures in each of the last 3 years despite having to make refund payments to Nexteer due to its property tax agreement. The township is projecting balanced operations in FY 2016 in the general fund, although there may be small operating deficits in each of the fire and police funds. The township has a goal of increasing available general fund reserves to 20% of expenditures and will do so through an increase in sewer rates and decreasing expenditures.
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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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016035
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016035
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https://www.fitchratings.com/regulatory
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