TEXT-Fitch cuts Howell Township, Mich. LT GOs to 'B'
Dec 13 - Fitch Ratings downgrades the following ratings for Howell Township, Michigan (the township): --$2.85 million limited tax general obligation (LTGO) bonds series 2004 to 'B' from 'BB'; --$300,000 special assessment bonds, series 2007 to 'B' from 'BB'; --Implied unlimited tax general obligation (ULTGO) bonds to 'B+' from 'BB+'. The rating is removed from Rating Watch Negative and a Negative Rating Outlook is assigned. SECURITY The special assessment bonds are secured by special assessments associated with various special assessment districts. They are also secured, as are LTGO bonds, by the township's full faith and credit general obligation, subject to applicable constitutional, statutory, and charter limitations. Debt service on LTGO bonds has historically been paid from revenues from the waste water treatment plant that the bonds were issued to construct. KEY RATING DRIVERS DOWNGRADE CONSIDERATIONS: The downgrade reflects the failure of millage increases in August and November. Fitch believes the increases were essential to restoring enterprise funds to self-supporting operations and preventing further use of general fund reserves. OUTLOOK CONSIDERATIONS: The Negative Outlook reflects Fitch's expectation of continued fiscal pressure and the limitations of available options as the township attempts to remain solvent. MANAGEMENT PROJECTS 2015 RESERVE DEPLETION: Management projects that debt service payments for the special assessment bonds will deplete available water/sewer (w/s) fund reserves in May 2014 and general fund reserves in May 2015. GENERAL FUND LIQUIDITY ADEQUATE: The general fund made a loan to the w/s fund to pay debt service in 2011. The loan remains outstanding, and revenue raising opportunities are limited. Nonetheless, the general fund has maintained a consistent cash position due to expenditure reductions and careful cost containment practices. RATE INCREASES HAVE NOT RESTORED STABILITY: The township has raised utility rates and introduced a debt service fee for the w/s fund. However, these increases have been insufficient to allow the w/s fund to fully support LTGO bonds, as was intended. Repayment is therefore expected to become reliant on general fund support. TAXABLE VALUES DECLINING: Declines in taxable value (TV) of the township's limited tax base are a concern as property tax revenue is approximately 43% of general fund revenues. REVENUE RAISING OPTIONS LIMITED: The one-notch distinction between the implied ULTGO rating and the LTGO rating reflects the limited level of overall financial flexibility given that the township's revenue raising options are restricted. WHAT COULD TRIGGER A RATING ACTION: DEPLETION OF GF RESERVES: Failure to avert the depletion of general fund (GF) resources will further reduce the cushion available for debt service and likely cause a further downgrade. EXTERNAL INTERVENTION: State intervention, for example in the form of an emergency manager or a state loan, may help the township address its projected insolvency but could also create a path to bankruptcy. CREDIT PROFILE W/S OPERATIONS REMAIN UNSTABLE The township issued its special assessment bonds to provide financing for w/s infrastructure in anticipation of housing developments. These developments were canceled due to the 2007-08 recession. Subsequent significant shortfalls in special assessment revenues have pressured the township's finances, necessitating extensive revenue and expenditure adjustments. As an interim step, the general fund loaned the w/s fund $1.4 million to cover debt service and expenditures in fiscal 2011, approximately $900,000 of which is outstanding. There is no set repayment schedule, although the loan is included as a receivable on the general fund balance sheet In fiscal 2012, utility rates increased (the sewer rate doubled while the water rate increased 30%) and the township instated a debt service fee. While the increases generate additional revenue, with August and November w/s millage failures, the fund remains unable to repay the general fund loan and is dependent on further support. Management does not anticipate placing another millage before voters before November 2014. With 82% of voters voting against the measure in November, Fitch expects that there will be little support for additional millages. MANAGEMENT PROJECTS MAY 2015 DEPLETION OF RESERVES Management projects that w/s reserves will be exhausted after the May 2014 bond payment, causing the township to rely more heavily on general fund support. Current projections show, and Fitch cash flow projections concur, that general fund cash will be exhausted with the township's May 2015 bond payment without significant revenue infusions. TOWNSHIP OPTIONS LIMITED With the failure of recent w/s millages, Fitch believes the township's options have become increasingly limited. Fitch believes that outside management such as a state emergency financial manager may be key to averting a payment default in May 2015. Assuming the emergency financial manager law continues in a form similar to Act 72 of 1990, invoking emergency financial management would allow the township a path to declaring bankruptcy. The township is exploring the sale of various tax lien properties associated with canceled developments to fully offset bond payments the townships has fronted, recoup other fees and penalties, and provide special assessment payments for the life of the bonds. While such a sale could help considerably with the township's ability to repay special assessment debt, Fitch believes that this scenario is subject to considerable execution risk, and is not a factor in the township's current rating. DEBT SERVICE BURDEN DWARFS POSITIVE GF OPERATIONS The magnitude of the township's debt service shortfall dwarfs general fund operations: debt service in fiscal 2012 was $2.5 million or 315% of general fund expenditures. However, the township has maintained large general fund balances relative to its very small budget in the past five years and reports similar results in fiscal 2012. Ending unrestricted general fund balance was $2.8 million or 340% of expenditures, with an addition to fund balance of $354,000 (56% of expenditures). However, much of this fund balance is offset with receivables from the utility funds. If these loans were written off, the general fund balance would be reduced by $1.7 million. The township reported approximately $1 million in general fund cash at year end. This provides a small cushion for any unexpected revenue shortfalls or spending needs. However, drastic expenditure reductions in the general fund have left little room for further cuts and revenue-raising opportunities are limited. The township does not anticipate that the w/s fund will borrow from the general fund in fiscal 2013, and is instead planning to use remaining enterprise cash to make debt service payments. The township's fiscal 2013 budget does not include use of fund balance and otherwise continues limited operations. Management reports revenues and expenditures in all funds are outperforming budget for the first five months of the fiscal year. INCREASES IN GENERAL FUND REVENUE UNCERTAIN Taxable values (TV) in the township saw sharp declines in recent years with the largest decline of 12% occurring in fiscal 2011. TV for 2012 declined 1.5%, below the 5%-7% declines projected by the county assessor and well below the 15% decline budgeted for by the township. The township is already levying the maximum operating millage under the Headlee amendment, so management cannot offset TV declines with a rate adjustment to avoid a drop in property tax revenue. The township's tax base is very small, magnifying concerns about the potential volatility of property tax revenue. Declines in state funding fiscal 2009 and 2010 were reversed with a large increase in 2011. As the state economy begins to recover it is likely that the township will see small increases in constitutionally determined state shared revenue as well. The township is not eligible for the Economic Vitality Incentive Program portion of state aid and is therefore less vulnerable to state aid reductions. LIMITED LOCAL ECONOMY SHOW SIGNS OF IMPROVEMENT Howell Township is located between Lansing and Detroit where the majority of its residents commute to work, generally in the high-tech, higher education, and health care sectors. Township employment data is unavailable; unemployment in Livingston County was 7.6% in September 2012, below the state rate of 8.2% and on par with the national rate. The unemployment rate in the county has declined approximately 15% from the same month last year, with minimal labor force declines indicating the possible beginnings of a recovery. Expansions at Magna International (automotive supplier) and BD Electrical Inc. combined with the relocation of Michigan Automatic Turning Inc. (transmission shaft and gear manufacturer for off-highway equipment), formerly AA Gear, to the township will provide for additional job growth in the area. HIGH DEBT BURDEN, MANAGEABLE PENSION OBLIGATIONS The township's overall debt burden is high at $4,460 per capita and 9.8% of market value (including the special assessment bonds). Principal amortization is above average, with 70% of the total outstanding retired within 10 years. Pensions for township employees are provided through a township-run single employer defined contribution plan. The fiscal 2011 contribution was moderate at 7% of general fund expenditures. The township does not provide other post-employment benefits. 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
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