News Column

Fitch Affirms Canton, MI LTGOs to 'AAA'; Outlook Revised to Stable

February 21, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the following Charter Township of Canton, Michigan (the township) ratings:

--Approximately $65.4 million in limited tax general obligation (LTGO) bonds, series 2003, 2004, 2005, 2006, and 2007, at 'AAA'.

--Implied unlimited tax general obligation at 'AAA'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The LTGO bonds are a general obligation of the township, secured by its full faith and credit and the levy of ad valorem taxes subject to applicable constitutional, statutory and charter limitations.

KEY RATING DRIVERS

OUTLOOK CONSIDERATIONS: Fitch's Stable Outlook reflects Fitch's expectation that financial performance has stabilized and fund balance levels will be maintained at current levels. The Outlook additionally incorporates evidence of recent stabilization in taxable value from steep declines as well as indication of economic recovery in the local housing market.

REVENUE-RAISING FLEXIBILITY: The township exhibits considerable revenue-raising flexibility which, coupled with a demonstrated willingness to raise revenues, mitigates Fitch's concerns over diminished but still healthy fund balances. Further, there is no rating distinction between the ULTGO and LTGO ratings based on the strong margin of revenue raising flexibility under the township's maximum operating limit.

FAVORABLE ECONOMIC PROFILE: The township continues to exhibit a strong underlying economic profile including above-average income levels and very low unemployment.

MODERATE LONG-TERM LIABILITIES: Debt ratios are moderate and outstanding principal is rapidly repaid. Fitch views favorably prudent advance-funding of a portion of retiree health benefits. The pension system is moderately underfunded; however, costs do not represent budgetary pressure.

STRONG MANAGERIAL PRACTICES: Management adheres to prudent and proactive policies and budgets conservatively. Recent enhancements, including formal fund balance policies and adoption of outyear budgets, are credit positives.

RATING SENSITIVITY

The rating is sensitive to shifts in fundamental credit characteristics, including diminished financial flexibility. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The township is located approximately 23 miles west of downtown Detroit in Wayne County. The township's population has stabilized at around 89,000 (estimated in 2012) after rapid growth in the early 2000s.

STABILIZED FINANCIAL POSITION

The township's financial profile is characterized by strong financial flexibility across all operating funds (general, police, and fire) with a fund balance level which Fitch believes will be stable in the long term although reduced from pre-recession highs. The township retains 1.49 mills of property tax revenue-raising flexibility under its statutory cap, which could generate up to an additional $5 million annually (equal to 10% of 2012 operating fund revenues). Additionally, the township's fire and police millages are not subject to statutory caps; the township last raised its public safety millages in 2010, which Fitch believes contributed to recent structural balance. The township additionally maintains a good amount of expenditure flexibility, with expenditure reductions to present largely from furlough days, consolidations and attritions, and some deferral of capital maintenance.

Financial performance for 2012 significantly beat budget and was break-even despite $3.9 million use of fund balance (representing 7.4% of spending) in the original adopted budget. Positive performance was driven by continued conservative budgeting and savings from 10 furlough days. The township's unrestricted fund balance (committed, assigned, and unassigned) at year end was 14.3% of operating fund spending, or $7.8 million. The township total fund balance policy, adopted in 2011, is for 15% of current year spending in each of its operating funds; the township is well in excess of its policy. Fire and police fund balances ($4 million or 7.7% of operating fund spending in 2012) are legally restricted to public safety operations and capital spending and not reflected in the unrestricted fund balance under GASB 54, understating the township's budgetary flexibility.

The original adopted 2013 budget included a $2.1 million use of fund balance across operating funds, but management expects an operating surplus due to the instating of a 1% property tax administration fee and conservative budgeting.

The township has adopted out-year budgets since 2011. Its 2014 budget contains $3.2 million in use of fund balance, continues furloughs at the same level as in 2013, and includes a 1% raise with step progression. Fitch believes that management's continued conservative budgeting will allow the township to materially reduce its budgeted fund balance draw.

STABLE REGIONAL & STRONG LOCAL ECONOMY

While the township is physically located proximate to Detroit, township residents are employed throughout the region, in such stable communities as adjacent Washtenaw County (home of University of Michigan, Ann Arbor), and nearby Oakland County, the economic engine of southeast Michigan. Long-term challenges remain consistent across the region, in continued diversification away from automotive industry.

Local unemployment was notably low at 2.8% in November 2013, well below county (9.3%), state (7.8%), and national (6.6%) averages. Wealth levels are high, with median household income at 170% of state and 157% of national averages. Major local employers remain stable, with PlymouthCanton Schools (2,160), the U.S. headquarters of Yazaki North America Corp., a manufacturer of automotive electrical and data components (1,131), and various retailers.

TAX BASE STABILIZES; INDICATIONS OF RECOVERY

Taxable assessed value (TAV) has declined 16.5% since 2008, and market value has declined 22.4%. Positively, the pace of declines has moderated, with small increases in TAV of 0.1% in 2013 and 0.3% in 2014 and a 3.7% increase in market value in 2013. Local permitting activity is up strongly, doubling from 2011 to 2012 and up 7.7% from 2012 to 2013. Management projects marginal 1% to 1.5% increases in TAV despite strong local activity, as growth in taxable value is limited to the inflation rate.

MANAGEABLE LONG-TERM LIABILITIES

The township's overall debt levels are moderate at $2,569 per capita and 3.4% of market value. The township's debt profile additionally benefits from rapid payout (73% in 10 years). Annual debt service cost in 2012 of $3 million was equal to a low 5% of operating fund spending.

The township's current capital improvement plan through 2017 anticipates $16.1 million in township costs with minimal borrowing anticipated.

The township participates in an agent defined benefit pension plan as part of Michigan Employees' Retirement Systems (MERS) and a hybrid plan. The township has introduced lower retirement cost plans since 2009, a positive for its long-term liability profile. The defined benefit plan is somewhat underfunded at 65% (Fitch-estimated assuming a 7% investment return); positively, the township is making its full annual required contributions (ARC). The township's retirement systems payments in 2012 represented a low 5% of operating funds spending.

The township has advance-funded its OPEB liability with over $4 million held and administered by MERS, and anticipates continuing such practice. The township contributed $1,200,000 to this reserve in 2012, thus funding $3 million or 50% of its ARC payment, consistent with years prior. The township's unfunded actuarial liability represented less than 1% of 2013 market value.

The township's carrying cost for debt, pension, and OPEB was a low to moderate 15% of 2012 governmental spending.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821230

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Stephen Friday, +1 212-908-0384

Analyst

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Karen Wagner, +1 212-908-0230

Director

or

Committee Chairperson

Laura Porter, +1 212-908-0575

Managing Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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