Fitch Rates Battle Creek TIFA, Michigan's LTGOs 'AA-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the tax increment finance authority of the City of Battle Creek, Michigan's (the city) $4 million tax increment bonds, series 2008 (limited tax general obligation; LTGOs) scheduled for negotiated sale on or about the week of Jan. 5. The city pledges its full faith and credit, subject to applicable constitutional, statutory and charter tax rate limitations for bond repayment. Bond proceeds will finance a new operations and maintenance facility for the W.K. Kellogg Airport. In addition, Fitch affirms the 'AA-' rating on approximately $78 million of Battle Creek and the Battle Creek Building Authority's outstanding LTGO debt. The Rating Outlook is Stable.

The 'AA-' rating reflects the city's diversifying economic base, adequate fiscal reserves, and moderate debt levels. The combination of revenue-raising capacity and the city's ability to compress capital spending leads to financial flexibility. Over the past five years, the city financed a portion of its capital plan using general fund reserves, drawing down on total fund balances. Fitch considers the city's general fund balance policy of maintaining unreserved, undesignated reserves of at least 10% of spending both prudent and important to the rating level. The weakening economic and employment picture in Michigan and the region contribute to a significant spike in the city's unadjusted unemployment rate, equal to 9.4% as of August 2008. Prolonged economic deterioration expressed in escalating unemployment or the loss of automotive jobs, combined with any substantial reduction of reserve levels, could potentially impact the city's rating.

Battle Creek lies along Interstate 94, which connects Detroit and Chicago, in south central Michigan. Battle Creek's local economy centers on automotive parts manufacturing, posing a significant risk given current industry restructuring, and breakfast food production. Denso Manufacturing, an automotive parts manufacturer that supplies mostly Japanese car producers, is the city's largest employer, followed by The Kellogg Co.'s (long-term IDR rating of 'A-' by Fitch) corporate headquarters.

The city ended fiscal 2007 (June 30 year-end) with an unreserved, undesignated general fund balance of $5.6 million or 12.1% of expenditures and transfers out, down from the 22.2% level recorded in fiscal 2001. The shortfalls have in part reflected increased capital investment as well as reduced state-shared revenue. The city will need to achieve financially balanced operations in its general fund to keep what Fitch considers to be an adequate level of reserves for the current rating level in place. Preliminary fiscal 2008 results indicate a small increase in unreserved balances.

The city's debt levels are moderate, with overall debt equal to $3,890 per capita, or 5.2% of full market value. Payout remains above average while future borrowing needs appear to be manageable.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.