Fitch Affirms East Grand Rapids, MI ULTGOs & LTGOs at 'AAA'; Outlook Stable
Fitch Ratings has affirmed `AAA' ratings on the following East Grand Rapids, MI bonds
--$8,430,000 unlimited general obligation (ULTGO) bonds, series 2004;
--$3,140,000 Michigan Transportation Fund GO limited tax (LT) bonds, series 2005.
The Rating Outlook is Stable.
The ULTGO bonds are secured by the city's full faith and credit and its ad valorem tax pledge without limitation as to rate or amount. The LTGO (Michigan Transportation Fund) bonds are secured by both the city's full faith and credit and its ad valorem tax, subject to constitutional, charter and statutory limitations as well as the city's allocation of amounts received from the state's Transportation Fund (the fund), which funds are generated from state-wide vehicle license and motor fuel taxes.
KEY RATING DRIVERS
STRONG FINANCIAL MANAGEMENT: The city benefits from a strong financial management team that practices conservative budgeting.
FINANCIAL FLEXIBILITY & LARGE RESERVES: Financial flexibility is supported by consistently strong unreserved general fund balances.
DIVERSE ECONOMY: Residents benefit from employment opportunities both within the city and throughout the Grand Rapids metropolitan area.
STABLE TAX BASE: Taxable Values (TV) are stable and provide a consistent base for property tax revenue.
MODERATE DEBT BURDEN: Overall debt burden is somewhat elevated due to overlapping debt from the local school district, although direct city debt is more moderate. The city has no additional debt plans in the near future and manageable pension and benefit obligations.
ABOVE AVERAGE ECONOMY
East Grand Rapids is located just east of Grand Rapids in western Michigan and is a small suburb with solid economic fundamentals. The city is a bedroom community with a stable population of around 10,700 in 2010. Wealth levels in the city for 2010 are above average, with median household income at over 200% and 190% of the state and national levels, respectively. County unemployment rates have fallen over the past two years to 5.5% in October 2012, well below state and national levels.
Major employers in the Grand Rapids area include Spectrum Health, Meijer, Inc. and Steelcase Inc. The local school district and Spectrum Health (east campus) are the city's major employers. Spectrum Health recently completed a $100 million renovation, which increased total employment to 1,800 within the city. Additional current economic activity includes increasing building permits for new single-family homes and condos.
STABLE TAX BASE
An overall positive trend of TV over the past five years demonstrates the desirability and stability of the city tax base. TV growth of 1.3% and 2.1% in the past two fiscal years offset a modest 1.4% decline in 2011. Market value per capita is high at over $110,000 for 2013.
As to be expected from a residential community, the city's tax base is not concentrated and the majority of its taxpayers are individuals. The base benefits from a downtown business district and the Gaslight Village retail area. Foreclosures in the city are minimal and property tax delinquencies have decreased in every year since 2010. The city's millage rate has remained level for five years and has not been subject to a roll back due to the Headlee amendment.
Residents benefit from a high level and quality of local municipal services. The city budget is heavily dependent on property tax revenues which account for approximately 70% of total general fund revenues. Unlike most Michigan localities, property tax revenue has not been subject to declines caused by the economic downturn. State shared revenue provides less than 10% of the city's general fund revenues and the city conservatively budgets zero statutory state aid which has been cut due to the state's fiscal issues.
Expenditure growth has been controlled through wage freezes, careful monitoring of new positions and overall spending. Additionally, expenditure growth has been controlled by requiring new hires to participate in a defined contribution plan as opposed to defined benefit plan. New city service employees and non-union employees were transitioned to the new plan in 1999 and public safety employees began in 2002. Currently, only 10% of the city's workforce remains in the defined benefit plan.
Overall, fiscals 2011 and 2012 results yielded small surpluses to the general fund, bringing total unreserved fund balance to a strong $2.5 million or 25% of expenditures. Fiscal 2013 is expected to maintain budgetary balance and strong reserve levels given management's conservative revenue estimates and demonstrated expenditure controls. Fitch expects the city to continue to exceed its informal minimum general fund balance policy of 15% of general fund expenditures and to maintain significant financial flexibility.
MIXED DEBT PROFILE
Overall debt levels are moderately high at over $7,500 per capita and 7% of tax base but these figures are largely attributable to a sizable borrowing by the local school district which comprises 75% of total debt outstanding. City debt amortization is average with 55% retired within 10 years. In addition, limited additional debt issuances are expected over the next few years, which should keep debt ratios manageable. Total carrying costs for debt service, pension and other post-employment benefit (OPEB) costs are moderate at 18% of combined expenses.
Pension costs for the city remain manageable due to the shift from defined benefit to defined contribution plans. City pension contributions to the state plan in fiscal 2012 were $694,000 and $356,283 to the defined contribution plan. The state pension plan funded ratio was a low 63% for 2012. The city administers a single-employer OPEB healthcare plan, which enjoys a small $235,072 net OPEB asset in fiscal 2012.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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 and IHS Global Insight.
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
U.S. Local Government Tax-Supported Rating Criteria
Bernhard Fischer, +1-212-908-9167
One State Street Plaza
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Arlene Bohner, +1-212-908-0554
Doug Scott, +1-512-215-3725
Elizabeth Fogerty, +1-212-908-0526