Fitch Rates Royal Oak, Michigan's 2008 LTGOs 'AA-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA-' rating to Royal Oak, Michigan's (the city) $11,825,000 capital improvement bonds, series 2008 (limited tax general obligation). The bonds will sell competitively on Dec. 11, 2008 and are secured by a limited ad valorem tax pledge. The series 2008 bonds will finance various capital improvement projects including parking additions, water and sewer infrastructure upgrades and vehicle purchases. In addition, Fitch has affirmed the following limited tax general obligations (LTGOs) at 'AA-'.

Royal Oak, Michigan

--$32.6 million LTGOs.

Royal Oak Building Authority

--$5.2 million LTGOs.

The Rating Outlook is Stable.

The 'AA-' rating reflects the city's above average wealth levels, sound financial position, and modest debt burden. The city's downtown serves as an entertainment center for the near northern suburbs of Detroit. Slowing commercial expansion, building permit activity, and a softened housing market has led to reduced tax base growth and the city's first decline in state equalized value for fiscal 2008 (June 30 year-end). Fitch notes that flat or potentially declining taxable value will pressure operations, as the city currently levies the maximum property tax rate. The regional economy has weakened substantially in the past year and although the city is not immune to the effects of auto industry retrenchment, the presence of retail and health care helps diversify the local employment base.

Located in southern Oakland County, Royal Oak is a mature suburb with an estimated 2008 population of 54,903, reflecting a 1.3% annual decline since 2000 due to a demographic shift toward smaller households. The city's proximity to the employment centers of Detroit, Ann Arbor, and Southfield, along with its location near the intersection of Interstates 696 and 75, attracts a well-educated and affluent workforce. Unemployment in the city has historically been 1%-2% lower than Oakland County and 2%-4% lower than the Detroit area and the state. In September 2008, unemployment averaged 4.1% in Royal Oak, compared to 6.6%, 8.5% and 6.1% for the county, state and nation, respectively.

While residents commute throughout the metropolitan area, local employers include William Beaumont Hospital (rated 'A', Negative Outlook by Fitch), the Royal Oak Public Schools, and Kroger's grocery. William Beaumont Hospital has recently announced about 200 layoffs and the regional economy continues to weaken. Prior to 2008, the city's tax base grew about 5% on average annually, but slowed to 0.8% in 2008. Also the city experienced its first reduction in state equalized value, which declined 4.1% in 2008. The city has some exposure to auto restructuring due to the presence of several auto parts suppliers, but the impact is somewhat mitigated by a growing health care sector.

Management's sound budgetary practices and policies have enabled the city to maintain a solid financial position. Unaudited fiscal 2008 results indicate that the general fund produced a surplus of approximately $1.7 million, increasing the unreserved undesignated fund balance to $7.9 million or 23.2% of spending. Fiscal 2009 results are expected to show a small surplus in the general fund. Declines in state shared revenue and property values will continue to pressure city finances. While large reserves remain a credit strength, maintaining current levels may be a challenge as any budget flexibility going forward will be highly dependent upon successful expenditure controls.

The city's use of internal resources to fund capital projects on a current basis and limited capital needs results in an overall debt burden of $2,433 per capita and 2.2% of full market value. The series 2008 bonds are secured by a limited tax pledge and paid through the city's operating property tax millage. The city's operating millage is restrained to inflationary growth and subject to annual rollbacks via the Headlee Amendment; the millage is currently levied at its maximum permitted rate.

Note: Fitch issued an exposure draft on July 31 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.