Dec 21 - Fitch Ratings has affirmed the 'CCC' rating for the following
Pontiac Tax Increment Finance Authority, Michigan (TIFA) bonds:
--$2.3 million TIFA (development area #2) tax increment revenue and refunding
bonds, series 2002.
In addition, Fitch affirms the implied unlimited tax general obligation (ULTGO)
rating for the city of Pontiac (the city) at 'B-'.
The ratings have been removed from Negative Watch. The rating Outlook is
The bonds are limited obligations of the TIFA payable solely from tax increment
revenues collected in the development area. There is a cash-funded debt service
reserve to the IRS standard.
KEY RATING DRIVERS
WATCH REMOVAL ON WASTEWATER TRANSACTION COMPLETION: The city has completed the
transaction with Oakland County monetizing the excess capacity at its regional
wastewater treatment plant, as planned. Restoration of general fund liquidity
relieves near-term negative pressure on the ratings and allows the city to
continue operations while pursuing solutions for structural balance.
SPECULATIVE GRADE ULTGO RISK FACTORS: The 'B-' implied ULTGO rating reflects the
city's poor financial performance, rooted in its lack of revenue-raising
flexibility, high fixed cost structure, and weak economic profile. The authority
of the state-imposed emergency financial manager (EFM) to rein in certain costs
is a credit positive, but structural balance has not yet been restored.
TIFA BONDS RELIANT ON CITY SUBSIDY: The 'CCC' rating on the TIFA bonds reflects
the city's demonstrated willingness to subsidize debt service on the bonds from
available non-pledged funds as pledged revenues are insufficient.
TAX INCREMENT ELIMINATED: Due to severe tax base declines taxable value (TV) in
the TIF district has dropped below the base amount, creating a negative
incremental value and eliminating tax increment revenues.
INCREMENT INSUFFICIENT TO SUPPORT DEBT SERVICE
Primary support for the bonds is derived from the city's continued willingness
to subsidize debt service, given the erosion of the pledged revenue stream; TV
in TIF #2 is now lower than the base value. An 80% drop in TV was recorded in
fiscal 2012, largely due to a successful General Motors Corporation (GM) tax
appeal. Meaningful recovery of the tax increment revenue stream is unlikely in
the near or medium term given the depths of the real estate downturn, the
projection of continued tax base erosion for the next several years, as well as
state-wide limits on annual growth of the property tax levy.
Likely sources of debt repayment include approximately $1 million on deposit in
the TIF #2 fund and approximately $985,000 in the cash-funded debt service
reserve. Additionally, the city has identified excess revenues from TIF #4,
whose bonds have been fully repaid, as a potential source for subsidy of TIF #2
debt service. The city does not anticipate subsidization from the general fund.
WEAK TAX COLLECTIONS
Citywide property tax collections have hovered around 75% for the past two
years. As with all local entities within Oakland County, the city is made whole
via the county revolving delinquent tax fund. However, there is a charge back to
the city after two years for uncollected taxes. The county also may decide to
terminate the revolving fund at any time.
ASSET MONETIZATION RESTORES GENERAL FUND BALANCE
The agreement with Oakland County to monetize the excess capacity of the
wastewater treatment plant generated $55 million for the city. Proceeds were
allocated to put money aside for water and wastewater system improvements ($5
million), retire revenue bond debt associated with the system ($4.1 million),
retire the 2006 fiscal stabilization bonds ($16.5 million), retire 2006 tax
increment finance authority/building authority bonds ($9.6 million), and to pay
the property tax appeal refund due to GM ($2 million). The remaining $17.8
million is allocated to deficit elimination.
Fitch believes Pontiac will continue to struggle economically and financially as
it works to transition away from its traditionally manufacturing-based roots.
The city has operated with a state-appointed EFM since March 2009. The EFM is
employed by the state to re-establish structural integrity and eliminate the
accumulative deficit within five years, with authority over labor negotiations,
hiring, spending, and most other financial concerns.
Last month Michigan voters overturned Public Act 4, the emergency manager law
that granted the EFM broad powers to address the city's substantial fixed cost
burden. The EFM is now operating under the prior law, Act 72. Newly passed
legislation, which has not yet been signed into law, would restore many of the
broader powers lost by the repeal of Public Act 4. The legislation would also
allow the city council to remove the EFM as early as April 1, 2014, but provides
some limits on how quickly the city council could reverse the EFM's decisions.
FUNDAMENTAL EXPENDITURE CHANGES
The state-appointed EFM has employed extraordinary expenditure reduction
methods, including outsourcing police responsibilities to Oakland County,
privatizing several governmental functions, dramatically reducing staff, selling
assets, streamlining health care costs, and monetizing excess capacity at the
regional wastewater treatment plant.
As a result of the expenditure reductions - coupled with the omission of certain
payments - the city generated a $4.6 million general fund operating surplus
after transfers (14% of spending) and ended fiscal 2011 with a $554,732 balance
or 2% of expenditures and transfers out. The positive ending general fund
balance was the first since fiscal 2002. Fitch notes the operating results were
partially achieved by omitting a $4.0 million pension and benefits payment and a
$1.9 million property tax refund owed to General Motors Corporation.
Unaudited results for fiscal 2012 show a $3.7 million operating deficit turning
the general fund balance back to a negative $3.1 million, equivalent to a
negative 7.3% of spending. The city anticipates returning the general fund to
positive territory in fiscal 2013 with the proceeds of the wastewater
transaction. Projections for fiscal 2013 call for adding $13 million to general
fund balance, which would put the total ending general fund balance at $9.9
million or 15.5% of spending. The city reports that the structural deficit has
narrowed, but still persists, with recurring expenditures exceeding recurring
revenues by $6 million for fiscal 2013.
The city is exploring ways to reduce or eliminate its costs for retiree health
care as a way to achieve structural budgetary balance. Currently, the city pays
approximately $5.6 million annually for retiree health care. Eliminating this
payment would close the structural gap between recurring revenues and recurring
expenditures. The EFM and mayor have proposed using the overfunded portion of
the pension fund to pre-fund the other post-employment benefit (OPEB) liability
which would reduce the city's annual costs.
Previously, the board governing the pension system has been unwilling to study
this plan. However, the EFM recently reconstituted the board and the new members
are expected to be more favorable toward studying the option. Fitch expects the
proposal will be met with legal challenges and will monitor any progress the
city makes toward achieving structural budgetary balance through this or other
CHALLENGING ECONOMIC PROFILE
Pontiac has been adversely impacted by the decline of the auto industry. At one
point GM employed 15,000 people and accounted for 25% of aggregate taxable
property value. But employment declined to 3,000 after the closure of both its
truck and assembly plants in 2009, and GM now accounts for less than 2% of TV.
Citywide unemployment rates have improved from 31% in October of 2009. However,
rates are still extraordinarily high at 21.8% in September 2012. The individual
poverty rate is more than double the state average, and median household income
equals 64% of the state mean. The current property tax collection rate is
extremely low at 75%. Oakland County makes the city whole through its delinquent
tax revolving fund, but the city is liable for charge-backs for uncollectible
amounts after two years.
MANAGEABLE LONG-TERM OBLIGATIONS
Overall debt levels are moderate, totaling $1,290 per capita and 3.8% of market
value. Principal amortization is above average, with 70% repaid within 10 years.
The city provides pension benefits to its employees through two single-employer
defined benefit pension plans. The city made one-half of its required
contribution in fiscal 2010, and none of the fiscals 2011 or 2012 amounts. One
of the plans is well over-funded, even after adjustment by Fitch to reflect a 7%
discount rate, and the other is nearly fully-funded.
The city also provides OPEB benefits, as mentioned, which the city currently
funds on a pay-as-you-go basis. As of December 2011, the OPEB unfunded actuarial
accrued liability (UAAL) totaled $180 million or a relatively high 8.8% of
market value. Fitch notes that staffing reductions and changes to health care
benefits have reduced the OPEB UAAL dramatically from the $306 million recorded
in the previous actuarial study.