NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AAA' rating to the following East Lansing, Michigan (the city) obligation:
--$3,600,000 general obligation limited tax (GOLT) bonds, series 2011A.
The bonds are scheduled for negotiated sale the week of April 5th. Proceeds will be used for various capital improvements.
In addition, Fitch affirms the following ratings:
--GOLT bonds at 'AAA';
--Unlimited tax general obligation (GOUT) bonds at 'AAA';
--GOLT building authority bonds at 'AAA';
--GOLT Michigan transportation fund (MTF) bonds at 'AAA';
--GOLT bond anticipation notes at 'F1+'.
The Rating Outlook is Stable.
RATING RATIONALE:
--East Lansing's advantageous location adjacent to the state capital and as home to a major university provides both abundant employment opportunities and economic stability.
--Management has demonstrated a history of prudent financial stewardship utilizing conservative budgeting and extensive monitoring and forecasting processes.
--The city retains marginal tax-raising capacity, which counters near term tax base concentrations.
--Debt levels are moderately low, principal amortization is rapid and future capital needs appear modest.
--The city's unfunded pension liability is notable, however, as a mitigant, the city has paid 100% of its required contributions to both pension and other post employment obligations for the last three years.
KEY RATING DRIVERS
--Management's continued ability to contain expenditures and maintain adequate reserves despite sustained revenue pressures driven by state aid volatility and projected tax base contraction.
--Maintenance of marginal taxing capacity and financial flexibility, without which a rating differentiation between the GOUT and GOLT could be made.
SECURITY:
--The GOUT bonds are secured by the city's full faith and credit and its ad valorem taxing power, without limitation as to rate or amount.
--The GOLT bonds are secured by the city's full faith and credit and its ad valorem taxing power, subject to constitutional, charter and statutory limitations. Certain bonds are also secured by tax increment revenues, special assessments, and payments from the township of Meridian and Michigan State University (MSU).
--The building authority bonds are secured by cash rentals payable by the city under the lease between the authority and the city. The cash rental payments are backed by the city's full faith and credit and its ad valorem taxing power, subject to constitutional, charter and statutory limitations. Payment under the lease is not subject to annual appropriation or subject to setoff or abatement for any cause.
--The MTF LTGO bonds are secured by both the city's full faith and credit and its ad valorem taxing power, subject to constitutional, charter and statutory limitations and the city's Act 51 MTF (Fitch rated 'AA+') receipts from the state. Fiscal 2010 receipts covered maximum annual debt service (MADS) 16.7 times.
CREDIT SUMMARY:
East Lansing, MI encompasses a 13 square mile area located adjacent to the city of Lansing, the state capital. In addition to abundant employment opportunities throughout the Lansing metropolitan area, the city's local economy is anchored by MSU with roughly 11,000 employees and 46,000 students. As to be expected given the city's proximity to the state capital, regional employment within the government sector is 175% of the national norm. As of January 2011, the city's unemployment rate (10.5%) was below the state average (11.3%) but above the national mean (9.5%). Residents are more educated with 68% of the population achieving a higher education versus 28% nationally. The sizable student population skews both the per capita income levels and individual poverty rate, which are 62% and 276% of the state mean, respectively. However, these statistics likely do not accurately reflect the students' purchasing power garnered from external sources.
The tax base is comprised of 59% residential property, 40% commercial and 5% personal property. The city's assessed valuation had shown continual growth historically, however, was adversely affected in 2011, declining 3.3% from the year prior. Management is projecting another 3% decline in 2012 and then essentially flat for the subsequent four years. Despite the national housing correction, full market value is still notable at $2 billion. The tax base is diverse with the top 10 taxpayers accounting for 15% of taxable assessed value.
After generating modest general fund operating deficits in fiscal 2008 and 2009, the city ended fiscal 2010 with a nominal surplus after transfers. The surplus was achieved primarily with a 4.7% ($1.4 million) reduction in expenditures. East Lansing ended the year with a 10.5% ($3.4 million) unreserved general fund balance, well within the city's 8%-15% formal fund balance policy. The city's 2011 initial budget projected a 1.9% ($600,000) general fund operating deficit after transfers, as the city prudently assumed state aid would be eliminated. After the city was informed state aid receipts would approximate the prior year's allocation, the budget was amended to reflect balanced operations including the reinstatement of roughly $1 million in capital maintenance. Based on mid-year results, management is confident at least breakeven results will be achieved for fiscal 2011. For fiscal 2012 and beyond, the city's multi-year forecast projects budget imbalance for each of the next five years; however, the city believes its practice of conservative budgeting and strict fiscal monitoring should result in actual general fund balances falling within the city's formal fund balance policy. The city has identified additional expenditure reductions including staffing reductions, to balance the fiscal 2012 budget. The city's willingness and ability to mirror expenditures with anticipated revenue declines, and maintain reasonable fund balances consistent with the rating category is a key credit factor. Any material deterioration in the city's financial flexibility could lead to a rating change.
The city's overall debt is easily managed at $1,750 per capita or 4.1% of market value, of which the latter is partially skewed by the MSU's significant tax-exempt property inventory. MADS as a percentage of combined general and debt service fund expenditures is extremely high at 28%; however, 76% of the direct debt obligation is self-supporting. MADS anticipated to be repaid from taxes is a more manageable 13% of combined expenditures. Principal amortization is rapid with 75% repaid within 10 years. The city's five-year capital improvement plan includes $17.5 million in bonding, including $16 million to refinance an outstanding $5.6 million BAN and also provide funds to construct a parking deck in downtown East Lansing. The parking project is expected to be self-supporting from tax increment and parking fee revenues.
The city provides pension benefits to legacy employees through a state sponsored pension plan that was 70% funded as of Dec. 31, 2008. Using Fitch's more conservative 7% discount rate assumption, the plan would be 63% funded. The pension's unfunded actuarial accrued liability (UAAL) totaled $42 million, which equaled 2% of the city's market value. The city paid $3.57 million in fiscal 2010 for pension benefits. The pension contribution equaled 12% of general fund expenditures, which is considered high. For new employees except police and fire personnel hired after 1999, the city annually contributes to a defined contribution benefit plan with no further obligation. Thirty percent of active employees are captured within the defined contribution benefit plan. Additionally, the city provides other post employment benefits (OPEB), whereby the city pays 100% of certain retirees' healthcare premiums until the retiree reaches Medicare eligibility. The UAAL totaled $40 million as of Dec. 31, 2006, or 1.9% of the city's market value. As a credit positive, the city has contributed 100% of the required OPEB contribution for the last three consecutive years, and has accumulated $5.9 million as of 2010 year end to offset the liability.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria this action was additionally informed by information from Creditscope, LoanPerformance, Inc., University Financial Associates, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria,' dated Aug. 16, 2010;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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.