Fitch Affirms Rochester Hills, Michigan's GOs at 'AAA'; Outlook Stable

Fitch Ratings takes the following actions on Rochester Hills, Michigan's bonds as part of its continuous surveillance effort:

--$6.45 million Rochester Hills general obligation limited tax (GOLT) capital improvement bonds, series 2002 affirmed at 'AAA';
--$0.4 million Rochester Hills Building Authority GOLT building authority bonds, series 2002 affirmed at 'AAA'.

The Rating Outlook is Stable.

RATING RATIONALE:
--The city is an affluent suburb 28 miles north of Detroit, featuring above average wealth levels and a solid tax base, despite recent recessionary contraction. Unemployment rates are trending down and remain well below those of the state and nation.
--Financial operations are well maintained, with the maintenance of ample reserves providing comfortable liquidity margins.
--A positive debt profile is characterized by moderate debt burden, above average payout and no plans for future borrowing.

KEY RATING DRIVERS:
--Projected contraction of the tax base will be a challenge over the next few years, particularly if the tax base erodes further than the city's conservative forecasting projects.
--Internal funding of capital projects combined with rapid payout and a lack of future borrowing plans should allow the city to retain its favorable debt profile.
--The presence of ample general fund reserves and the retention of margins under operating millage limits provide vital flexibility as the city weathers the economic downturn.

SECURITY:
--General obligation limited tax bonds are secured by the city's full faith and credit general obligation and ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.
--Building authority general obligation limited tax bonds are secured by cash rentals under a lease between the building authority and the city. The obligation to make the cash rental payment carries the city's full faith and credit general obligation and ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations. The obligation to make the cash rental payments is not subject to setoff or abatement for any cause nor is it subject to annual appropriation.

CREDIT SUMMARY:
Located 28 miles north of Detroit, suburban Rochester Hills is home to an affluent population, featuring per capita income at 170% of the state. Although primarily residential, the city's commercial/industrial segment, which represents 20% of the tax base, provides depth and diversity to the local economy. Recessionary pressure has stalled growth in taxable values, which is projected to decline further by 11% in 2011, 12% in 2012 and 5% in 2013 before stabilizing in 2014. Anecdotally, however, city officials report a recent pickup in commercial/industrial activity, citing a 28% increase in building permits and a decline in the vacancy rate from 15% to 10% this year.

Favorably, the city's unemployment rate, which was 7.8% in June, is trending downward, and remains well below those of the state (13.1%) and nation (9.6%). While the labor force has been contracting steadily over the past decade, officials report that several new employers are expected to add over 850 new jobs to the local economy by the end of this year, which should strengthen the employment base.

Financial operations are well maintained. The city utilizes sophisticated multi-year forecasting tools to plan for economically induced revenue declines and to make quarterly budget adjustments. Operating surpluses in three of the last four years have left the general fund with a $15.2 million fund balance, equivalent to a healthy 57.6% of expenditures; almost the entire fund balance is unreserved. The city did experience a modest $277,000 operating deficit in 2009, but this was attributable to the city's mid-year decision to advance-fund its $2 million other post employment benefit obligation.

The city expects to end 2010 with small operating surplus. As the tax base is expected to contract over the next several years, the city anticipates managing its declining revenue stream by making compensating expenditure cuts. The 2011 budget calls for a 9% decline in revenues and a 12% reduction in expenditures with no appropriation of fund balance. An early retirement incentive program trimmed 22 positions from the city's payroll in 2010, and the use of a contracted police force provides additional flexibility in managing labor costs. The city remains beneath its statutory millage limitation for both the general and fire funds. Long-term forecasts indicate the city may raise the fire millage to its limit in 2012 but has no plans to do so with the general fund millage.

Direct debt is low, measuring 0.4% of full value, or $518 per capita. Overlapping borrowing brings debt burden to a more moderate 2.7%. Debt service claims a substantial 20% of operating revenues, but the rapid amortization schedule and a move toward internal funding of capital projects eases concerns. The city does not anticipate issuing new money debt in the next five years.

Additional information is available at www.fitchratings.com.

In addition to the sources of information identified in the report 'Tax-Supported Rating Criteria', this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight.

Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16, 2010
'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009

For information on Build America Bonds, visit www.fitchratings.com/BABs.

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=492470

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