Fitch Affirms Ottawa County, MI's GOs at 'AAA'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the following Ottawa County, Michigan (the county) limited tax general obligation (LTGO) ratings at 'AAA':
--$35.5 million outstanding limited tax general obligation (LTGO) bonds (listed by series below);
--$7 million outstanding Ottawa County Building Authority bonds and Building Authority refunding bonds, Series 2005 at 'AAA';
--Implied unlimited tax general obligation (ULTGO) at 'AAA'.
The Rating Outlook is Stable.
The LTGO bonds are backed by the county's full faith and credit general obligation and ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.
Building authority limited tax general obligation bonds are payable from cash rental payments under a lease between the building authority and the county. The obligation to make the cash rental payment carries the county'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 set-off or abatement for any cause nor is it subject to annual appropriation.
KEY RATING DRIVERS
STRONG FINANCES: Conservative budgeting and judicious use of reserve funds has enabled the county to maintain sound financial operations while maintaining substantial financial flexibility.
AVERAGE SOCIOECONOMIC PROFILE: Income levels approximate those of the state and nation. The county's tax base has stabilized, and local unemployment is well below the state and U.S. averages.
MODERATE DEBT LEVELS: County-related debt levels are moderate and debt service costs are a modest portion of the budget. Other long-term liabilities, including other post-employment benefit (OPEB) costs and pension are expected to remain manageable given the county's substantive steps to reduce future costs.
LTGO RATING ON PAR WITH IMPLIED ULTGO: The equivalent 'AAA' ratings reflect the substantial financial flexibility enjoyed by the county, as evidenced by its sizable reserve levels and moderate taxing margin.
LEASE OBLIGATION ON PAR WITH LTGO: The 'AAA' rating on the building authority bonds reflects the county's general obligation, limited tax pledge to make rental payments, which is not subject to appropriation or abatement.
SHIFTS IN CREDIT CHARACTERISTICS: The rating is sensitive to shifts in the county's strong financial profile and the stable local economy. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely over the next review cycle.
The county is located in the southwestern section of Michigan's lower-peninsula on the coast of Lake Michigan on its western border. Encompassing 565 square miles, the county is approximately 174 miles west of Detroit and 150 miles northeast of Chicago. The Census 2010 population of 263,801 represents compounded annual growth of 1% from the previous census, and the 2014 population estimate of 276,292 indicates continued growth.
ECONOMY SHOWING SIGNS OF RECOVERY
The local economy is highly dependent upon manufacturing (primarily automotive and office furniture), which is expanding due to increased demand for durable goods after a significant recessionary contraction. Unemployment rates, which ranged from 11%-12% during the height of the downturn, have normalized and are now below the state and national averages. The September 2015 rate of 3% is below the 4.7% recorded for the year prior and compares favorably to the state (5%) and nation (5.5%).
Taxable values have stabilized in recent years, also due to a steady economic recovery. Taxable values grew 3.2% in 2014 and 5.5% in 2015, and an assumed 2.9% gain in the 2016 budgetary projections includes an adjustment for appeals. The county projects steady tax base growth of approximately 3% annually from 2017 through 2019, which Fitch believes is realistic given increased permit and development activity. County residents' wealth indicators are somewhat mixed, with per capita income at 101% of the state and 93% of the nation, and median household income registering a more positive 116% and 112% of the state and U.S. averages, respectively.
HISTORY OF STRONG FINANCIAL PERFORMANCE
The county's financial operations are characterized by balanced operations and maintenance of solid general fund balances, supplemented by ample reserves outside of the general fund. Adding to the county's financial flexibility is a 0.665 mill margin beneath the maximum allowable operating millage, which could generate $6.7 million annually, or 12.3% of fiscal 2014 spending, based on the 2014 taxable valuation. The county has no plans to utilize the margin, but its existence remains an important pillar of revenue flexibility.
The county also has access to reserves outside of the general fund which help to smooth the impact of unexpected costs to the general fund. For example, the delinquent tax revolving fund had $21.6 million in unrestricted net assets at fiscal 2014 year-end, equivalent to 40.4% of fiscal 2014 general fund spending. Access to these funds offers the county a ready alternative to property tax increases.
PLANNED USE OF GENERAL FUND BALANCE
In fiscal 2014, the county utilized $4.6 million of its ample general fund balance, including a $3.7 million planned transfer to the capital projects fund and a $500,000 use of funds to cover the costs associated with converting from a defined benefit pension plan to a defined contribution pension plan. Despite the draws, the county ended fiscal 2014 with a solid $31.7 million in unrestricted general fund balance, or 33.2% of operating expenditures. This reserve total was solidly in excess of the 10-15% of general fund expenditures policy minimum.
The fiscal 2015 budget includes an unchanged millage rate of 3.6 mills with modest tax levy growth resulting from the 5.5% taxable valuation increase. The county budgeted a $1.9 million use of general fund balance, which includes a transfer for capital expenditures. Based on year to date results, departments have continued their historical trend of under-spending budgeted amounts and the projected year-end total general fund balance remains healthy at approximately $42 million.
MODERATE DEBT LEVELS
The debt burden is moderate at 4.3% of market value or $4,407 per capita. Existing debt is scheduled to amortize rapidly, with 72% repaid within 10 years. Debt is expected to remain modest given the county's limited borrowing plans over the next 10 years, although the county expects to continue its practice of issuing debt for local entities.
The county has taken substantive steps to manage its long-term liabilities. The county participates in the Michigan Municipal Employee Retirement System (MERS), and is transitioning from a defined benefit to a defined contribution pension model. Management projects that the defined contribution plan will save the county approximately $30 million over the next 30 years.
Also, the county in 2014 issued $29.3 million in pension obligation bonds which increased pension funding ratios from 78.5% in fiscal 2013 to 90% the following year. The plan is adequately funded on a Fitch-adjusted estimate of 81.1% using a more conservative 7% discount rate. Fitch considers the use of pension obligation bonds to be generally credit neutral when the plan is closed, as the county's is.
In addition, the county has prudently begun funding its OPEB liability. The OPEB trust was 88.9% funded as of Dec. 31, 2014. Carrying costs are low, with debt service, pension ARC, and OPEB expenses, including amortization of the accrued liability, representing a modest 5.5% of fiscal 2014 governmental expenditures when adjusted for the pension bond proceeds.
Fitch affirms the following LTGO bonds at 'AAA':
--$675,000 Ottawa County (MI) (Crockery Township Sewage Disposal System) GOLT tax sewage disposal bonds series 2004;
--$560,000 Ottawa County (MI) (Jamestown Township 2000 Sewer & Water Improvements) sewage disposal & water supply bonds series 2000;
--$555,000 Ottawa County (MI) (Port Sheldon Township Sewer Improvements Project) GOLT sewage disposal bonds series 2002;
--$145,000 Ottawa County (MI) (West Central Ottawa Wastewater Treatment Plant Expansion Project) GOLT sewage disposal bonds series 2002;
--$33,530,000 Ottawa County (MI) GOLT water supply bonds series 2007.