NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Battle Creek, Michigan (the city) bonds:
--$16,000,000 limited tax general obligation bonds (LTGO), series 2013.
The bonds are expected to price the week of Aug. 13. Bond proceeds will fund various capital improvements.
Additionally, Fitch affirms the following Battle Creek, MI bonds:
--Implied unlimited tax general obligation bonds (ULTGO) rating at 'AA';
--$12,255,000 LTGO refunding bonds, series 2011 at 'AA';
--$40,765,000 LTGO Battle Creek downtown development bonds, series 2008 at 'AA';
--$6,410,000 LTGO Battle Creek tax increment finance authority bonds, series 2009 and 2010 at 'AA';
--$4,940,000 LTGO Battle Creek building authority bonds, series 2008 at 'AA'.
The Rating Outlook is Stable.
SECURITY
All LTGO bonds are ultimately secured by the city's pledge of its full faith and credit and its ad valorem tax, subject to charter, statutory and constitutional limitations. The downtown development bonds, tax increment finance authority bonds, and building authority bonds are secured in the first instance by a pledge of tax increment revenue.
KEY RATING DRIVERS
STABILIZING FINANCIAL PERFORMANCE: Recent financial margins have turned positive, with surplus operations in 2012 and 2013 (projected), suggesting stabilization in the city's financial profile after several years of marginal draws.
PROACTIVE, PRUDENT MANAGEMENT: Management employs extensive financial and capital planning tools. Fitch expects management to continue containing expenditures and maintain acceptable financial margins given the continued susceptibility of the city's financial performance to economic cyclicality and the importance of income tax to the city's revenue base.
ABOVE AVERAGE TAX BASE CONCENTRATION: The city's top three taxpayers are a high 14% of the total taxable assessed value (TAV) led by Kellogg Company, Denso Manufacturing, and Kraft Foods Inc.
AVERAGE ECONOMY: Unemployment rates remain above, and city income levels well below, state and national levels. Fitch expects stabilization of the manufacturing employment base and/or diversification into other employment sectors over the long term given the city's strong local infrastructure.
MANAGEABLE DEBT AND PENSIONS: The city's debt profile is moderate and benefits from pay-as-you-go capital investment, rapid amortization, and modest future borrowing needs. Pension funding levels vary from below average to well-funded but the city consistently contributes the full annual requirement and carrying costs are moderate.
EXPOSURE TO TAX INCREMENT SHORTFALLS: The city's tax increment revenues currently cover debt service; however, coverage is thin and has declined for the downtown development authority (DDA) and may require general fund support in future. GF support beyond a moderate level would pressure the rating.
LTGO RATING ON PAR WITH IMPLIED ULTGO: The LTGO bonds are rated on par with the implied ULTGO rating on the basis of the city's solid general fund reserves and a margin of taxing capacity under statutory limits.
RATING SENSITIVITIES
FINANCIAL & ECONOMIC FUNDAMENTALS: The rating is sensitive to shifts in fundamental credit characteristics including the city's financial management practices, stable fiscal performance, and adequate reserve balances, which partially mitigate concerns about the cyclical nature of revenues and concentration of the local economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE:
Battle Creek is located in south central Michigan roughly 42 miles southwest of Lansing and is best known as the historic capital of breakfast food production. City population has been stable around 53,000 over the past three decades.
CYCLICAL, MANUFACTURING BASED ECONOMY
Kellogg Company (Kellogg) has a large presence within the community, serving as both the city's largest taxpayer at 9% of total taxable valuation (TV) for 2013 valuation and the largest employer with 2,500 employees. Kellogg (senior unsecured rating 'BBB+'; Stable Outlook) has continued to make significant investments within the city, including a $54 million expansion of its research and development center in 2009 and the recent addition of a few hundred new employees following an acquisition.
Other top employers include Denso Manufacturing Michigan Inc. (Denso), an automotive parts firm, which further contributes to the cyclical nature of the local economy, as well as medical services firms and government sector employers, which provide some measure of stability. Fitch believes that there is a reasonable expectation for job growth given continued private investment over the past four years and an associated 2,117 jobs to be created over the coming five years.
The city's unemployment rate remains elevated at 8.5% in May 2013, above both state and national averages and on par with year prior. The current unemployment rate is improved from 2009 through 2011, when the unemployment rate was above 10%. Employment within the manufacturing sector as a percentage of total employment is still double the national average, despite regional economic diversification in recent years.
City wealth levels are below average with per capita income levels at 84% of the state mean and individual poverty rates at 152% of the national average.
CONCENTRATED TAX BASE, MANAGEABLE VALUE DECLINES
Battle Creek's TV has declined 12% since peak in 2010; recent declines have been moderate, with a 1.8% decline in 2012 and a 3.6% decline for 2013, approximately a third of which was driven by tax appeal adjustments.
The city's tax base is concentrated with the top 10 taxpayers accounting for a high 26.1% of total TV. The city tax base is comprised of 45% residential property, 21% commercial and 31% industrial in 2013. The city reports that there is a tax appeal for the past three years from Mushashi Auto Parts, Inc.; however, all of the TV at risk is limited to the tax increment finance authority (TIFA) area which maintains a solid cushion in its strong coverage. Tax collections have remained strong through the recession and remain above 99%.
EXPOSURE TO TAX INCREMEMT SHORTFALLS; MIXED COVERAGE
The city's tax increment districts (TIFA and DDA) are highly concentrated by leading taxpayers and have had valuation fluctuations over the past five years. The bonds also carry the additional security of the city's LTGO pledge. Historically, the districts have generated sufficient annual property tax increment and state business tax reimbursement revenues to support their annual debt service payments without additional city funding. Fiscal 2012 increment district debt service coverage for TIFA was strong at over 6.75x but thin at 1.12x for the DDA's $5 million payment (representing 12% of general fund spending) and down from 1.25x a year prior. While Fitch believes the DDA is poised for stabilizing if not a slight uptick in AV and therefore coverage given recent developments, a prolonged need for general fund support could pressure the city's rating.
STABILIZING FINANCIAL PERFORMANCE
The city's revenue profile is diverse. Property and income tax each account for 35% of general fund revenues in 2012 with less dependence on revenue sources outside of the city's control; intergovernmental revenues accounting for 15% of revenues in 2012. The city has a 0.7142-mill (6.7%) margin available under its Headlee roll-back limit for operations, which would generate an additional $700,000 or 1.6% of 2012 revenues. Had the city used this flexibility, operations would have been roughly balanced 2009 through 2011.
The city posted positive performance in 2012 with a $89,000 surplus (0.2% of spending) after three consecutive years of marginal reserve draws. The city's unrestricted fund balance was $6.9 million or an adequate 15.9% of spending, in excess of management's policy target of 8%. Positive operations suggest that the city's efforts to right-size its spending base over the past three years with salary and benefits concession and headcount reductions have been successful. Fitch will continue to monitor ongoing operations, as management's continuing ability to mirror expenditures with recurring revenues is a key credit consideration.
Management is projecting positive operations in 2013, with a projected $233,000 surplus (0.5% of spending), compared to a budgeted $182,000 draw. The positive operations were driven by strong income tax performance, up 12.7% year-on-year and 6.8% ahead of budget, and continued cost containment. The city's 2014 budget is balanced with a stable total property tax millage and includes a 2% raise for non-union employees, an additional general fund position, and the restoration of some benefits such as tuition reimbursement.
MODERATE, RAPIDLY AMORTIZING DEBT
Total city debt levels are moderate to high at $3,672 per capita or 6% of market value, including the current offering. Over 50% of the total debt outstanding is from local school districts. Overall carrying costs, including tax-increment debt service and including pension ARC and other post-employment benefits (OPEB) actual payments, are below average at 17.5% of governmental expenditures (net of capital spending) and would remain manageable at 20% if the OPEB ARC were fully funded.
Amortization is rapid with 86% repaid within 10 years. The city's current capital improvement program calls for $127 million in improvements over five years across tax- and revenue-supported funds, with minimal expected tax-supported debt as the city funds a significant amount of capital improvements from its annual budget.
The city provides employment benefits to its public safety staff through a single-employer defined benefit pension plan, which was adequately funded 79.1% as of June 30, 2012. This plan assumes a 7% rate of return. The city's non-uniform union staff participate in a state-sponsored agent pension plan, which was funded at 72.4% or a somewhat weaker 65.2% estimated using a 7% rate of return assumption. The city consistently fully funds its actuarial required contribution.
The city has negotiated benefit concessions and eliminated some benefits for new hires, but these are expected to have minimal near-term benefit to the city's OPEB profile. The city has advance funded a portion of its OPEB UAAL, with approximately 45% of its ARC paid in each of the past three years. The city's OPEB trust, what was last valued in June 2009, was a mere 2.8% funded, but did not incorporate recent benefit changes or subsequent advance funding; the most recent OPEB UAAL (June 30, 2009) was $52.4 million or 1.6% of 2013 market value.
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, National Association of Realtors, and Zillow.
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=798487
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