OREANDA-NEWS. Fitch Ratings has affirmed the following Sterling Heights, Michigan (the city) bonds:

--$4 million unlimited tax general obligation (ULTGO) fire station bonds, series 2008 at 'AA+';
--$1.7 million limited tax general obligation (LTGO) bonds, series 2005 refunding at 'AA+';
--$2.7 million limited tax special assessment bonds, series 2008 at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The ULTGO bonds are payable by the city's full faith and credit and its ad valorem tax pledge without limitation as to rate or amount.

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

KEY RATING DRIVERS

STRUCTURAL BALANCE RESTORED: Voters approved a 2.5 millage increase, effective fiscal 2015, that allowed the city to restore structural budgetary balance. The city projects continued structural balance while adding to reserves.

TAX BASE CONTRACTION: Total taxable assessed value (TAV) declined more than 25% over the last six years. TAV realized a modest increase in fiscal 2015.

MIXED ECONOMY WITH MODERATE CONCENTRATION: Socioeconomic indicators are mixed, with above average income levels and unemployment levels on par with national levels. The economy is moderately concentrated in the auto industry.

MANAGEABLE LONG-TERM LIABILITIES: The city's debt burden is low, and the city has limited future capital needs, which it plans to fund with a mix of debt and cash. Carrying costs are high, and pension funding levels are mixed.

ADEQUATE FINANCIAL FLEXIBILITY: Fitch makes no distinction between the ULTGO and LTGO ratings due to the city's adequate overall level of financial flexibility and satisfactory taxing margin under the statewide cap.

RATING SENSITIVITIES

FAILURE TO MAINTAIN STRUCTURAL BALANCE: The city has achieved structural balance with the recently voter approved millage increase. A return to structural imbalance and unexpected draws from reserves would pressure the rating.

CREDIT PROFILE

The city is located in Macomb County, 18 miles north of Detroit. The city is the fourth largest in Michigan with a population of slightly more than 130,000.

STRUCTURAL BALANCE ACHIEVED

In November 2013, 54% of voters approved a 2.5 millage rate increase effective fiscal 2015. The general fund is allocated 1.7 of the 2.5 mills, equivalent to $7.1 million annually (8.8% of spending), while the remaining 0.8 mills, equivalent to $3.3 million annually, is allocated to the local road fund.

The millage increase allowed the city to restore structural balance in fiscal 2015. Previously, revenues were substantially negatively pressured by declines in the TAV which resulted in continued structural imbalance. TAV declined 25% from fiscal 2008 to fiscal 2014 but returned to growth with a 2% increase in fiscal 2015.

After several years of draws on reserves, the city generated an operating surplus and added $2.3 million to its general fund reserve balance in fiscal 2015. Total available fund balance for general fund use, which includes the general fund and self-insurance fund net of a holdback for claims payment, remain healthy at $21.7 million (26.9% of spending). The fiscal 2016 budget adds $900,000 to general fund reserves and out-year projections show continued surplus operations.

MIXED ECONOMY WITH SOME AUTO CONCENTRATION

The city's local economy has traditionally been linked to the automotive industry, with Ford and Chrysler comprising 9% of fiscal 2014 TAV. Signs of stabilization within the local economy and significant investments by both firms partially offset Fitch's concentration concerns. Chrysler currently employs about 3,000 people, which is an increase of nearly 500 employees in two years, and has recently announced a $166 million investment in its facility to retool operations. . Additionally, Ford employs 2,300 people, an increase of 900 from just two years ago. The city also has a growing defense industry presence, with General Dynamics employing 1,900 people.

The August 2015 unemployment rate of 5.7% is above the state and national averages, both of which are 5.2%. Median household income is at 113% and 110% of state and national averages, respectively.

MANAGEABLE LONG TERM LIABILITIES

Per capita overall debt is low at $1,190 per capita but moderate at 3.7% of market value. Amortization is rapid with 92% retired in 10 years. The city plans to use cash to fund its near-term capital needs, apart from a $9 million debt issuance in fiscal 2016. Fitch does not expect the issuance to change the overall debt profile.

The majority of city employees participate in either the General Employees' Retirement System or the Police and Fire Retirement System, both of which are single-employer defined benefit plans. The city consistently contributes 100% of its annual required contribution (ARC) for both plans. The General Employees' Retirement System remains adequately funded at an estimated 76% and the Police and Fire Retirement System funded ratio is weak at 61%, with both funding levels being calculated using Fitch's more conservative 7% investment return assumption. Positively, the city also consistently contributes 100% of its other post-employment benefits (OPEB) ARC. Carrying costs for debt service, pension and OPEB are high at 27.8% of fiscal 2014 total governmental funds expenditures.