OREANDA-NEWS. Fitch Ratings has affirmed the following Port Huron, Michigan ratings at 'A':

--approximately \\$2.24 million general obligation limited tax refunding bonds series 2006;
--approximately \\$2.29 million general obligation limited tax water supply system revenue refunding junior lien bonds series 2006;
--approximately \\$3.87 million general obligation limited tax bonds series 2007B.

The Rating Outlook is Stable.


General obligation limited tax bonds are a first budget obligation payable from the general funds of the city, and if necessary, from ad valorem taxes levied on all taxable property in the city, subject to applicable charter, statutory and constitutional limitations.


STABLE, HEALTHY GENERAL FUND: Recent general fund operations have been stable and reserves remain healthy despite a pressured revenue environment.

WEAK DEBT PROFILE: Substantial borrowing for combined sewer overflow projects has driven debt to well-above average levels. Fixed costs for debt, pension, and other post-employment benefits (OPEB) make a large claim on city resources.

SIZEABLE UTILITY RATE INCREASE: The council recently approved a significant rate increase for the wastewater fund. The increase signals the city's commitment to closing the wastewater fund deficit and positions the fund to fully support debt service requirements in the future.

DECLINING POPULATION AND INCOME: The city has experienced sustained declines in population and resident wealth levels, which are well below average. In addition, unemployment remains notably elevated relative to county, state, and national averages.


CONTINUED ECONOMIC WEAKNESS: Further deterioration of already weak economic indicators may pressure the rating.

ENTERPRISE SELF-SUPPORT WOULD IMPROVE DEBT PROFILE: The rating is sensitive to the subsidies necessary to support the city's enterprise funds. An improved operational profile of these funds that would eliminate reliance on other city resources would have positive credit implications.


Port Huron is located in eastern Michigan, along the border with Ontario, Canada, one hour north of Detroit. It is the seat of St. Clair County. The population has declined by approximately 10% since 2000, to an estimated 29,168 in 2014. Fitch believes that such continued declines are likely.


The local economy benefits from the trade generated by the Blue Water Bridge, which is the second most active commercial port of entry between the United States and Canada.

Local economic weakness has been exacerbated by tax base loss, with assessed value (AV) down approximately 28% since 2010. Early indications signal that the City's AV will increase modestly in 2016, including positive trends in home prices (2.5% in 2015 and a projected 2.9% in 2016, per Zillow).

Resident wealth levels are depressed and high unemployment persists. The individual poverty rate is high at 28.6%, approximately 186% of the national average and nearly twice the county's rate. Post-secondary educational attainment is roughly half the national average.

The June 2015 unemployment rate remains quite elevated at 9.7%. The rate compares favorably to year prior at 13.5%, but is notably weaker than the county's rate of 7.5%, the state's rate of 5.7% and the 5.3% national average. The decline in unemployment rate is aided by a 2.5% reduction in participating labor force, with a modest 0.7% increase in employment.


Port Huron's well above-average debt levels are attributable to large water and sewer infrastructure investment. The overall debt burden is a very high 10.1% of fiscal 2014 market value, or \\$4,222 on a per capita basis.

Most of the debt carries the city's general obligation limited tax pledge as well as a pledge of net revenues of the water and sewer system but is not fully supported by enterprise revenues. Despite recent rate increases in the wastewater fund, net revenue coverage of debt service remains well below 1.0x, declining from 0.5x in fiscal 2013 to 0.3x in fiscal 2014. The city's water fund support for debt service has fluctuated, with 1.0x coverage in 2012 dropping to 0.4x in 2013 and then increasing again to 0.9x in 2014.

While neither utility fund is reliant on general fund support, Fitch is concerned about the use of non-recurring funding sources to cover debt service. However, the city has recently shown strong commitment to the wastewater fund's solvency by increasing rates significantly. In fiscal 2014, the wastewater fund required a \\$2.25 million transfer from the land purchase fund in order to cover all costs, including debt service. In fiscal 2015 and 2016 respectively, the city budgeted transfers of \\$2.4 million and 2.34 million, from the senior citizens housing fund to the wastewater fund, using the proceeds from a building sale.

The council approved a 18.5% sewer rate increase in fiscal 2015, which will provide approximately \\$2 million in additional revenues in fiscal 2016, and additional rate hikes of 3% to 4% each year through fiscal 2020to close the wastewater fund gap. Management's goal is for enterprise revenues to fully support debt payments by 2020.

Annual debt service represents a considerable claim on city resources. The magnitude of debt service payments is notably high in comparison with general government operations: debt service was approximately 25% of governmental expenditures. Debt service amortizes rapidly with 79% paid in 10 years.

The city's does not have any major capital projects planned and the city's 2015 - 2021 capital improvement plan is considered non-essential. Capital needs have been further reduced with the recent completion of the State required combined sewer overflow (CSO) project. The city's ten-year 2-mill road levy received voter reauthorization in November 2013 and proceeds are designated for roadway repairs.


The city participates in the Municipal Employees' Retirement System of Michigan, an agent multi-employer plan. The city consistently funds 100% of the actuarially-based annual required contribution (ARC), but at year-end 2014, the plan was only 65% funded, or an estimated 58% funded when adjusted by Fitch to reflect a 7% discount rate. Beginning in 2015, the City plans to pay down its unfunded pension liability by contributing \\$500 thousand annually in excess of the full ARC payment.

Favorably, the city has pre-funded a portion of its unfunded liability for other post-employment benefits (OPEB). The OPEB plan was 20% funded as of June 30, 2013. The city contributes 100% of the OPEB ARC, totaling \\$3.3 million or approximately 11% of governmental spending in fiscal 2014. Recent changes in OPEB benefits may alleviate some of this high cost. While Fitch considers prudent the city's approach to full funding of the OPEB ARC, the unfunded actuarial accrued liability remained large at \\$48 million in fiscal 2013 or a high 3.9% of market value of the city.

The fixed cost burden for debt service, pension, and OPEB is high at over 45% of fiscal 2014 governmental spending, including the portion of utility debt service not covered by enterprise operations. If the utility debt were self-supporting, carrying costs would drop to a still sizable 21% of governmental spending. This indicates the high burden of pension and OPEB carrying costs as there is no outstanding debt for general government purposes.


Careful monitoring of revenues and tight expenditure controls have enabled the city to record annual operating surpluses and to maintain ample general fund reserves, despite the constrained revenue environment. All of the city's ad valorem tax rates are levied at their statutory maximum.

Port Huron is one of 22 cities in Michigan to levy an income tax, which it assesses on 1% of residents' income, and 1/2% of non-residents' earnings from within the city. Fitch believes the city's revenues are vulnerable to the long-term trend of population and economic decline; tax revenues continued to decline through fiscal 2014, although fiscal 2015 results are expected to show some growth Expenditures have held relatively steady as staffing cuts and restructured operations have offset other increases, and operations remain balanced.

In fiscal 2014, the city recorded a slight surplus in the general fund, bettering budget and showing a \\$4.5 million unrestricted fund balance (21.2% of spending). The city adopted a new fund balance policy in 2014 (25% of expenditures) and is expecting to reach compliance in the near term.

In fiscal 2015, the city expects to record another slight operating surplus, transferring excess monies to the fringe benefit fund. Fiscal 2016 budget is balanced, including the appropriation of \\$1.3 million to the beautification commission fund and for routine capital projects.