Fitch Ratings takes the following rating action on Romulus, Michigan's limited tax general obligation (LTGO) bonds as part of its continuous surveillance effort:
--$6.02 million LTGO Capital Improvement Bonds, series 2006 downgraded
to 'BBB+' from 'A+';
--$15.91 million Tax Increment Finance
Authority LTGO Recreation Center Bonds, series 2006 downgraded to 'BBB+'
from 'A+';
In addition Fitch assigns the following rating:
--unlimited tax
general obligations (implied) at 'A-'
The Rating Outlook is Negative.
RATING RATIONALE:
--The downgrade to 'BBB+' from 'A+' reflects the
city's weakened financial position as evidenced by large draws on
reserves to offset revenue declines from weak property tax collections
and reduced state aid;
--The Negative Outlook reflects Fitch's
concern regarding the city's limited revenue raising ability as it is at
its legal taxing limit. Taxable values have declined significantly, and
voters rejected two recent millage increase proposals;
--While the
city has made significant cuts to services and personnel to reduce
expenditures, additional cuts may affect the ability to provide basic
services, which could detract from economic and financial health.
--The
city has a favorable debt profile with rapid amortization.
WHAT COULD TRIGGER A DOWNGRADE?
--Declines in revenue beyond
current expectations due to lower assessed values or additional
decreases in state aid;
--Inability to further reduce spending in a
manner that maintains minimal reserves and preserves basic services for
city residents;
--Unfavorable outcome of large number of property
tax appeals and labor negotiations.
SECURITY:
--The LTGO bonds are secured by the full faith and credit
pledge of the city, subject to applicable constitutional, statutory and
charter limitations;
--The Tax Increment Finance Authority (TIFA)
bonds are secured by the tax increment revenues collected with the
development area. As additional security, the city has pledged its full
faith and credit, subject to applicable constitutional, statutory and
charter limitations.
CREDIT SUMMARY:
Romulus is a mature suburb of Detroit, located in
the southwestern portion of Wayne County, and home to the Detroit
Metropolitan Wayne County Airport. Wealth indicators in the city are
below average, with per capita money income just 81% of the state and
75% of the national averages. After a spike in 2009 to 11.8%, in line
with increases throughout the state and nation, Romulus's unemployment
rate declined significantly to 8.8% in December 2010, below the county,
state and national unemployment rates.
The city's state equalized valuation (SEV) fell by 11.2% in 2009, 12.5% in 2010 and 8.5% in 2011. General Motors has a large engine plant in Romulus and is the top taxpayer in the city, making up almost 10% of the tax base. GM has appealed assessed values at all of its U.S. properties, and Romulus could be required to rebate already collected property taxes - the city has budgeted $500,000 in Fiscal Year (FY) 2011 and $325,000 in FY 2012 against potential judgments in this and other tax appeals, representing approximately half the disputed amount.
Management expects the GM appeal to be resolved in the near future. The city estimates it has property tax appeals from 80% of its corporate taxpayers.
The city's financial operations have weakened swiftly, and Fitch is concerned that this trend will be difficult to reverse. After several years of general fund operating surpluses, the city had a $2.1 million deficit in FY 2010, bringing its unreserved fund balance to $2 million or 9.7% of expenditures. For FY 2011, the city expects total fund balance to decline to $1.2 million despite an expected $2.2 million (10%) of expenditure reductions, and for FY 2012, it has budgeted a further decline resulting in a very weak fund balance of $489,000 (2.7% of spending) despite an additional $600,000 of planned expenditure reductions.
Fund balance declines are primarily attributable to declines across all revenue sources. In FY 2010, property taxes made up 53% of revenues and tax collection rates were a low 90.43%. The city's operating millage is at the maximum permitted rate without a voter referendum. Romulus went to voters seeking five-year millage increases in August, 2010 and again in February, 2011, informing residents that there would be significant cuts to services without an affirmative vote, but both times voters rejected the increases. In response, the city has made major expenditure cuts, including 36 layoffs (reducing the city to 148 full time employees), reduced senior services, and the closing of the city library and all city parks in the near future.
Romulus has also seen a large reduction in revenues from fines and forfeits, which made up 16% of revenues in FY 2009, as a result of declines in ticketing due to reductions in enforcement personnel. With state revenues budgeted to decline $300,000 in FY 2012, the city is attempting to comply with the governor's "best practices" initiatives to restore some of that funding.
The city has renegotiated its Teamster and AFSCME contracts through FY 2012 to include health care reductions and 5% pay cuts achieved through 13 annual unpaid furlough days. The police command and police officers labor contracts expired in 2010, and the city is in arbitration with its police officers. The fire labor contract expired in 2009 and negotiations continue. The city hopes to achieve similar concessions from these unions. Romulus recently received a $1.3 million FEMA grant that will allow it to rehire seven fire fighters for two years.
The city's debt profile is favorable and includes moderate debt levels and above-average amortization. Romulus is currently evaluating issuing bonds through the TIFA later in 2011 to securitize unallocated state school funds to finance infrastructure improvements. The outstanding TIFA bonds are self-supporting by a healthy margin and Fitch does not expect that they will require the aid of their general fund pledge.
The city recently released a comprehensive capital improvement plan but most projects are on hold until city finances stabilize and it can restore eliminated services. Romulus is a member of Michigan Municipal Employees' Retirement System ("MERS") for police, fire and the mayor. Those not in MERS participate in a defined contribution plan. Romulus consistently makes all required pension contributions. Total payments for pensions, the defined contribution plan and other post-employment benefits were $3.8 million in FY 2010, representing 17.9% of total expenditures, and are expected to increase to a high 21.8% in FY 2012.
Additional information is available at www.fitchratings.com.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating
Criteria' (Aug. 16 20100;
--'U.S. Local Government Tax-Supported
Rating Criteria'( Oct. 08 2010).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S.
Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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Contacts:
Fitch Ratings
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Eric Friedman, +1-212-908-9181
Director
Fitch,
Inc.
One State Street Plaza
New York, NY 10004
or
Secondary
Analyst:
Ann Flynn, +1-212-908-9152
Senior Director
or
Committee
Chairperson:
Amy Laskey, +1-212-908-0568
Managing Director
or
Media
Relations:
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com