In the course of routine surveillance, Fitch Ratings has downgraded Port Huron, Michigan's approximately $116.6 million outstanding limited tax general obligation (LTGOs) to 'A' from 'A+'. The Rating Outlook is Stable.
The downgrade reflects regional and local economic dislocation due to ancillary exposure to the automotive industry and associated revenue pressure with contracting income and property tax revenues. The rating further reflects the city's strong reserve levels that should allow the city some flexibility as it makes tough decisions regarding utility rate increases and continued expenditure reductions given that the city is operating at its property tax rate cap and continued taxable value declines are likely over the near term. As the economy may prove challenging for the foreseeable future, the key rating driver is the city's ability to continue to meet financial challenges and maintain ample reserves.
Located 60 miles northeast of Detroit, Port Huron is the county seat of St. Clair County (rated 'A' by Fitch). Local economic indicators have historically been below state and national averages as evidenced by above-average unemployment levels and below-average wealth levels. Median household income in 2007 was 72% of state averages and 67% of national. In addition, exposure to the automotive industry through small, local parts suppliers and manufacturers and other employers in the industrial sector has exacerbated underlying weaknesses in the city's economic base. As a result, unemployment increased to 25.7% in September 2009 from 14.3% the year prior compared to state and national averages which equaled 14.8% and 9.5%, respectively.
Strong financial management practices have resulted in healthy reserves both in and outside of the general fund. The city is currently managing revenue declines in all major categories including income tax (roughly 28% of revenues), state aid (16%) and property taxes (35%). Over the last several years, management has been able to maintain its unreserved fund balance through a concerted effort to reduce expenditures which included reductions in service and headcount. Unreserved fund balance for fiscal 2008 equaled $4.2 million or 16.9% of spending, compared to fiscal 2006 which equaled $3.8 million or 17.3% of spending. Fund balance is again projected to increase slightly for fiscal 2009 despite initially budgeting for flat performance to $4.3 million or 18.5% of spending. However, the city has conservatively budgeted for a $400,000 drawdown for fiscal 2010 as a result of pronounced pressures in the city's property and income tax bases.
After a history of modest growth in taxable value (TV) of about 2.9% average annual growth, TV for fiscal 2010 declined by 1.6% and is expected to decrease by another 7% in fiscal 2011. The city levies at its maximum Headlee operating millage and TV declines have translated into revenue of about $200,000 in fiscal 2010 and $500,000 in fiscal 2011. Adding to the declines are income tax revenues, which are projected to decrease by 13.5%, or $800,000, in fiscal 2010, following a 13.1% decrease in fiscal 2009. The city has assumed flat income tax performance in fiscal 2011 but may be vulnerable to further declines if the economy does not stabilize. Further pressuring overall financial performance is the city's water and sewer fund which currently relies on transfers from other funds to cover debt service costs. While management is currently reviewing its rate structure and projects that transfers are sustainable over the near term, the imbalance in the water/sewer fund certainly adds to overall financial pressure.
Assuming continued general fund support of existing debt, the city's net direct debt levels are moderately high at 6.1% of market value and average at $1,363 per capita. Including the city's overlapping debt, levels increase slightly to 7% of market value or $1,966 per capita.
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