OREANDA-NEWS. Fitch Ratings affirms the following ratings on Taylor, Michigan's (the city) general obligation bonds:

--\$4.4 million limited tax general obligations (LTGOs) series 2004 and 2005 at 'BB';
--\$505,000 million LTGO downtown development (DDA) bonds series 2002 at 'BB';
--\$14.5 million Brownfield Redevelopment Authority (BRDA) bonds, series 2005 and 2006 at 'BB';
--Implied unlimited tax general obligation rating at 'BB+'.

The Rating Outlook is Stable.

SECURITY

The LTGO bonds are secured by the city's full faith and credit general obligation and its ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.

The DDA and BRDA bonds are secured by relevant tax increment revenues collected within the development area. As additional security the city has pledged its full faith and credit subject to applicable constitutional, statutory and charter limitations.

KEY RATING DRIVERS

SIGNIFICANT IMPROVEMENT IN FINANCIAL PERFORMANCE: Implementation of a deficit elimination plan resulted in drastic expenditure cuts in fiscals 2013 and 2014 and sizable surpluses that eliminated the city's deficit earlier than projected. Moderate budgetary pressures will continue over the near term.

SLUGGISH TAXABLE VALUE: Taxable value (TV) has declined notably for the five years through 2014 with some stabilization expected for fiscal 2015. Fitch does not expect much growth in the base in the near term as the city has limited new developable land.

MINIMAL REVENUE-RAISING FLEXIBILITY: Property taxes are the city's main revenue source. The city is currently at its property tax cap, so revenue-raising options are limited.

CONTINGENT OBLIGATIONS: The general fund is obligated to support contingent obligations whose intended repayment source has not fully materialized. General fund support of these obligations is expected to continue to be needed over the life of the obligations.

LIMITED FINANCIAL FLEXIBILITY: The one-notch difference between the LTGO and the implied ULTGO ratings reflects the city's severely limited financial flexibility, as evidenced by the history of negative unrestricted general fund balance combined with the inability to increase property taxes or other revenues.

DEVELOPMENT BONDS CARRY LTGO PLEDGE: The DDA and BRDA bonds carry a pledge of both tax increment revenues and the city's LTGO. The ratings are based upon the LTGO due to historical and projected increment revenue shortfalls, and the lack of an additional bonds test.

RATING SENSITIVITIES

ABILITY TO MAINTAIN BUDGETARY BALANCE: The rating and Outlook are highly sensitive to management's ability to continue the recent trend of budgetary surpluses, restoration of general fund liquidity without inter-fund borrowing, and performance of other credit factors. Continuation of positive trends could lead to upward rating action.

CREDIT PROFILE
Taylor is located in Wayne County, MI, approximately 18 miles southwest of Detroit. The city has experienced a 6.2% population loss since 2000, with 61,817 residents in 2014.

GENERAL FUND DEFICIT ELIMINATED
The city of Taylor's notable decline in financial flexibility was due to management's inability to match expenditure reductions to rapid declines in property tax revenues and state shared revenues. Audited fiscal 2011 and 2012 results posted the largest of several annual general fund operating deficits, over \$5 million in each year. This resulted in an unrestricted general fund deficit of \$5.4 million or 11.6% of expenditures by the end of fiscal 2012.

The city adopted and implemented a deficit elimination plan (DEP) mid-year in fiscal 2012 which included significant expenditure reductions including personnel cuts and salary and benefit concessions. Audit results for fiscal 2013 and 2014 indicate sizable operating surpluses totaling \$5.7 million which reversed the deficit to a small positive \$390,000. These surpluses eliminated the general fund deficit earlier than management's original fiscal 2016 projection. Modest improvement in state revenues and stabilized property tax revenues as a result of improved collections contributed to the improvement.

Fiscal 2015 cash basis results through March 2015 project continuation of surplus operations, projected at \$500,000, and the achievement of an unrestricted general fund balance of \$907,000 or 3% of budget. As Taylor is at its maximum property tax rate, TV is expected to be flat to modestly positive at best, and state shared revenues are likely to increase only moderately, continued positive operations have been driven by recurring expenditure cuts and labor contract savings. Fitch expects many of these savings to continue but the city may be pressured with demand for service restoration in the coming years. The city's very high annual carrying costs for debt and pensions are a budgetary challenge. Overall carrying costs for direct city and contingent debt service plus pension and other post-employment benefits (OPEB) funding are high at 33% of total governmental expenditures. The city could seek voter approval for a dedicated police/fire or deficit-elimination levy, support for which is uncertain.

Liquidity needs are being met by short-term loans of up to \$7.5 million annually from the city's water and sewer enterprise funds. The loans have been repaid using property taxes by Oct. 31 of each fiscal year. Continued improvement in general fund budgetary balance has reduced the borrowing amount by half in fiscal 2015. Enterprise fund liquidity remains strong with \$11.5 million, or 300 days cash on hand in fiscal 2014. Reduced reliance on short-term borrowing would be a credit positive.

CONTINGENT OBLIGATIONS NOT SELF-SUPPORTING
Financial operations face additional pressure due to general fund exposure to the BRDA issues. The 2005 A and B BRDA bonds were expected to be self-supporting from tax revenue captured from the building of approximately 200 homes. The housing development has not occurred and only modest development is planned over the next one to two years. The city general fund began to subsidize repayment of the bonds in fiscal 2012 in the amount of approximately \$800,000. The subsidy is expected to decrease following a refinancing which provides small annual debt service savings and the shifting of some costs to the utility fund. The amount of debt that can be reimbursed by the utility fund is approximately 23%, which will provide relief to the general fund. Additionally, the city projects some excess DDA funds will be available in 2017 as some debt is retired.

The 2006 BRDA bonds were also expected to be self-supporting; however, two out of the three projects generate insufficient revenues. Total potential general fund subsidy for all BRDA issues represents a modest approximately 2% of fiscal 2014 general fund expenditures.

LOCAL ECONOMIC CONDITIONS REMAIN UNFAVORABLE
Taylor is located in the 'downriver' area of metropolitan Detroit and has strong ties to the auto industry, which has led to a difficult economic climate. The general slowdown in the housing market coupled with a significant number of foreclosures has put downward pressure on property values. Unemployment has improved and averaged 7.2% in 2014 which was below the county (9.4%) and the state (7.4%) but remains above the nation (6.2%). The decline in the unemployment rate was due partially to a 1.2% reduction in the labor force over the past decade. Taylor's poverty rate was 21.2% in 2013, compared to the state's at 16.8%, and the nation's at 15.4%.

TV has declined by over 30% since 2009. The city projects 0.7% TV growth in 2015 and slightly increasing values thereafter based on the county assesor's projections. Fitch believes these projections are realistic given continued modest recovery in the housing market and the lagged effect on TV.

Current tax collection rates have been low at approximately 91% over the past five years. While it is the practice of Wayne County to reimburse the city for all delinquencies at the end of each fiscal year, the payment is subject to charge-backs if the county is unable to collect the delinquent taxes or sell the property. The city experienced modest improvement in collections and lower chargebacks in fiscal 2013 and 2014. The top 10 taxpayers make up a moderate 11.6% of total TV.

PENSION, OPEB & DEBT OBLIGATIONS MANAGEABLE IN NEAR TERM
Overall debt is moderate at \$1,918 per capita and 4.4% of market value. The city has no plans to issue additional debt and amortization is rapid with 75% of total principal retired within 10 years. Overall carrying costs for direct city and contingent debt service plus pension and OPEB funding are high at 33% of total governmental expenditures.

The city administers two defined benefit pension plans covering nearly all police, fire, and general government employees; court employees are covered by the state-run Municipal Employee Retirement System (MERS). Using a 7% rate of return, MERS was adequately funded at about 80% in fiscal 2013. The city administered plans were funded at 53% and 68% despite annual ARC payments, which could lead to even higher carrying costs in future budgets. OPEBs are funded on a pay-go basis, which was a high 12% of total governmental spending in 2014. Additionally, the unfunded actuarial accrued OPEB liability is high at 8% of the tax base market value.