Fitch Affirms Buena Vista Twp, MI's LTGOs at 'BBB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings takes the following rating action on Buena Vista Township, Michigan's (the township) bonds:
--$2.7 million limited tax general obligation (LTGO) bonds affirmed at 'BBB'.
In addition, Fitch affirms the implied unlimited tax general obligation (ULTGO) rating at 'BBB'.
The Rating Outlook is Stable.
The bonds are payable from tax increment revenues collected by the township's Downtown Development Authority. The township has also pledged its limited tax, full faith and credit as additional security, subject to applicable constitutional, statutory and charter tax rate limitations.
KEY RATING DRIVERS
ADEQUATE RESERVES; SMALL BUDGET: The township's reserve position is adequate given the limitations on other measures of financial flexibility. Revenue raising capacity is constrained by state-imposed property tax limitations, which, compounded with the township's small size, creates a very limited margin for error.
CONCENTRATED TAX BASE: The local economy is highly concentrated around Nexteer, an automotive parts supplier that recently won a large tax appeal.
WEAK ECONOMIC INDICATORS: Demographics are weak, characterized by declining population, below average wealth levels, and a high poverty rate.
SOLID TAX INCREMENT COVERAGE: Coverage of maximum annual debt service (MADS) is solid. However, tax increment revenue is exposed to risks associated with high taxpayer concentration and very low incremental value as a percent of base year assessed value (AV). The current coverage level alleviates pressure on the general fund.
MANAGEABLE LONG TERM LIABILITIES: Overall debt levels are moderately low. The township has affordable carrying costs.
MAINTENANCE OF RESERVES: Maintenance of balanced financial operations is critical to mitigating many of the township's credit risks, including its small size, concentrated tax base, and weak revenue-raising flexibility.
The township is located in the northeast portion of Saginaw County, approximately 79 miles northeast of Lansing. The township's 2013 population of 8,408 represents a cumulative 19% decline from it 2000 population.
TAX REFUND PAYMENTS STRAIN ALREADY LIMITED FINANCIAL FLEXIBILITY
The township finished fiscal 2014 with a general fund surplus of $81,000, increasing unrestricted general fund reserves to $912,000 or 29.5% of expenditures.
Due to the township's large ongoing transfers between the general fund and several other governmental funds, Fitch believes it prudent to analyze the township's total governmental fund position. Fitch believes that the township's total governmental unrestricted fund balance level at the end of 2014 of $912,000 (18.3% of total governmental spending) provides a modest cushion as the township continues to make tax refund payments to Nexteer. The company comprises 21% of the township's tax base even after its AV was adjusted downward in fiscal 2010. Its appeal requires the township to make refund payments totaling $558,000 in equal installments in fiscal years 2014, 2015, and 2016, approximately a third of which is paid by the general fund. An 11% decline in township AV from 2013 to 2014 was related to a state-wide phase-out of personal property tax, but Fitch expects most or all of the lost property tax levy to be made whole by the proceeds of an offsetting state-wide sales tax. AV stabilized in 2015, declining only 0.7%.
Management is currently projecting no change in fund balance for 2015, even with the second of the three $66,000 general fund tax refund payments due that year. Exact final results will depend on how much the township chooses to transfer to support the sewer fund, which had a $359,000 unrestricted net deficit at the end of 2014. Management is considering substantial sewer rate increases in 2016 to improve the fund's financial position, as well as pursuing outside grant funding. Balanced general fund operations are anticipated going forward. The township is currently levying at its maximum operating tax rate under the Headlee limitation.
CONCENTRATED LOCAL ECONOMY; WEAK ECONOMIC INDICATORS
The local economy is significantly tied to the automotive industry given the presence of Nexteer. The company continues to grow, launching its initial public offering in November 2013. Duro-Last, another automotive company, makes up 5% of the tax base and is located in the tax increment district. Duro-Last recently added a large piece of equipment that will expand its manufacturing capacity.
Township wealth levels are well below average, with median household income equaling 50% and 45% of the state and national averages, respectively. The county's unemployment rate of 6.1% in May 2015 is comparable to the state average, although well above the national average of 5.3%. Depopulation and a weak local housing market have led the township to pursue an extensive home demolition program.
MANAGEABLE LONG-TERM OLIGATIONS
Overall debt per capita is low and debt to market value moderate. Amortization is moderate with 43% of principal retired within 10 years. The township has no further issuance plans and capital needs are reported to be minimal.
Pensions are provided through the Michigan Municipal Employee's Retirement System (MERS), an agent multiple-employed defined benefit plan. When adjusted for Fitch's 7% discount rate, the township's portion of the plan was weak at 65.5% funded at fiscal yearend 2014. Fitch believes efforts the plan has taken to improve funding might result in increased pension payments. Other post-employment benefits (OPEB) are provided on a pay-go basis. Total carrying costs for debt service and retirement benefits are moderate at 15.8% of total governmental spending.
TAX INCREMENT REVENUES PROVIDE SOLID COVERAGE
Tax increment revenues continue to provide solid coverage, covering MADS 2.65x in 2015. Coverage improved from 2014 as a result of the expansion at Duro-Last. Nexteer is not in the tax increment district. Tax increment coverage holds up well to a variety of stresses, with a 66% AV decline necessary to reach 1.0x MADS coverage.
Fitch expects tax increment revenues to remain adequate to repay the bonds, but solid coverage is offset by significant weakness surrounding the tax increment revenue stream. The top 10 taxpayers in the district account for a very high 51% of total AV, with Duro-Last representing 18%. The top 10 taxpayers account for a very high 83% of incremental value. Incremental value as a percent of base year AV is very low at 143%, indicating a high degree of pledged revenue volatility for a change in TV. The downtown development district is moderate relative to other Fitch-rated tax increment districts at approximately 1,547 acres.