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Rating Update:

MOODY'S AFFIRMS Aa1 RATING THE CITY OF STERLING HEIGHT'S (MI) GENERAL OBLIGATION LIMITED TAX DEBT

21 Dec 2010

Aa1 RATING APPLIES TO $14.8 MILLION OF MOODY'S RATED GO DEBT

Municipality
MI

Opinion

NEW YORK, Dec 21, 2010 -- Moody's Investors Service has affirmed the Aa1 rating on the City of Sterling Height's (MI) $14.8 million of Moody's rated general obligation limited tax debt. The city has a total $4.8 million of general obligation unlimited tax (GOULT) and $25 million of general obligation limited tax (GOLT) debt outstanding. Moody's has also removed the negative outlook.

RATING RATIONALE

The GOLT bonds are secured by the city's limited ad valorem tax pledge. The Aa1 rating reflects the city's sizeable but declining tax base with significant auto industry presence, satisfactory financial operations with alternate liquidity, and a manageable debt burden.

SIZEABLE DECLINING TAXBASE WITH SIGNIFICANT AUTOMOTIVE PRESENCE

Located in Macomb County (GO rated Aa1/stable outlook) and just northeast of Detroit (GO Ba3/negative outlook), the city's substantial taxbase has a significant Chrysler (rating withdrawn) and Ford Motor Co. (long-term rating Ba2/stable outlook) presence. Previously at risk of significant job losses and property tax revenue losses, the local economy is showing signs of improvement and stabilization. Chrysler, which has an assembly and a stamping facility in the city, comprise a total of 4.5% of the city's taxbase. The Chrysler assembly facility was originally scheduled to close in December 2010. Notably, the assembly facility is remaining open with plans to expand and retool for the Chrysler 200 and Avenger models. In addition, the Twinsburg (GO rated Aa2/), Ohio (GO rated Aa1/ negative outlook) plant was closed and the operations were moved to the Sterling Heights stamping facility. The city has offered a six year tax abatement for the Chrysler assembly plant to stay in the city. Chrysler currently employs 2,000 and the expansion is expected to add an additional 900 jobs. Ford has two facilities as well, which include an axle and transmission facilities. Combined, the Ford facilities employ 1,400 and are the city's second largest taxpayer, comprising 4.4% of assessed valuation. Officials report the Ford facilities are stable as the company invested in transmission re-tooling for the F150. The regional economy is expected to continue to improve, although at a moderate pace, as the Chrysler facility is remaining open, having a positive effect on ancillary companies. The city reports that other major local taxpayers and employers, including General Dynamics Co. (senior unsecured rated A2/ stable outlook) a defense manufacturer with 2,278 employees, are relatively stable. The city's unemployment rate of 11.1% is higher than the nation's of 9.5% but lower than the state's of 12.9% for August 2010.

The city's substantial full valuation of $11.6 billion has seen continued declines in valuations due to depreciation of residential and commercial properties. The city is expecting taxable valuation trends to continue to decline in coming years with a 2% to 8% fall in valuations through at least 2011. Officials are not expecting taxable and full valuation to rise again until 2012. Resident income levels, although higher than state and national medians, have declined in the past decade with per capita and median family incomes are currently 112.6% and 131.2% of the state, respectively.

SATISFACTORY FINANCIAL POSITION WITH ALTERNATE LIQUIDITY; PLANNED REDUCTION IN GENERAL FUND RESERVES

We expect the city's financial operations will remain satisfactory despite planned reductions in General Fund reserves due to alternate liquidity and conservative budgeting practices. Due to declining taxable valuations, the city is expecting continued reductions in property tax revenues and also expects declines in state shared revenues through the next few fiscal years. Management has a financial plan to close the gap from declining revenues through a combination of expenditure reductions, use of reserves, and implementation of various revenue enhancements through fiscal 2015. The city plans to maintain a minimum of ten to 14% of General Fund revenues in reserves. The city closed fiscal 2008 with a General Fund balance of $15.3 million, or a healthy 17.8% of revenues. For fiscal 2009, although the city originally budgeted to use of $1.8 million of General Fund reserves, results came out better than anticipated. Due to savings achieved from the elimination of 27 positions as well as a one-time transfer of $750,000 from the Budget Stabilization Fund, fiscal 2009 closed with a General Fund balance of $15.2 million, or a still healthy 17.4% of revenues. In fiscal 2010, the city originally budgeted to use $4.6 million of reserves, but ended the year with a lesser $2.7 million deficit. The city achieved substantial savings through reductions in staff through attrition, overall expenditure controls and increases in revenues including administrative, towing and wood chipping fees. As a result, fiscal 2010 closed with a General Fund balance of $12.6 million, or a satisfactory 15% of revenues. Officials are expecting to use a maximum of $2 million of General Fund reserves in fiscal 2011. However, due to savings achieved from wage concessions, open positions and an increase in the city's property tax millage, officials report that operations are performing better than budget year-to-date.

The city benefits from revenue raising flexibility and alternate liquidity that can help mitigate the loss of declining property tax and state shared revenues. Under Headlee, the city is limited to 10.8 mills for operations. The city increased the operating millage to 10.1 mills from 8.7 million in fiscal 2011 which equals approximately $9 million in additional property tax revenues. The city still retains 0.7 mills for operations which would yield approximately $3 million in additional property tax revenues. Additionally, the city maintains alternate liquidity in the Internal Services Fund which had an unrestricted net asset position of $18 million at the end of fiscal 2010. The funds in the Internal Services Fund are available for operations at the discretion of council. While management does have a fiscal plan to address declining revenues, continued negative taxable valuations with ongoing revenue losses with significant use of General Fund reserves may lead to further pressure on the credit.

MANAGEABLE DEBT POSITION EXPECTED TO BE MAINTAINED

We expect that the city will maintain a favorable debt position, due primarily to modest debt burden and a rapid principal amortization. The city's overall debt burden at 1.7% (0.3% direct) is modest and principal payout is rapid, with 86.3% of principal repaid in ten years. The city has no plans to issue debt in the near-term.

WHAT COULD CHANGE THE RATING UP:

-Improvement in local economic trends, including tax base, job growth, and unemployment indicators.

-Restoration of balanced or surplus General Fund operations with limited reliance upon non-recurring revenue enhancements or expenditure reductions.

WHAT COULD CHANGE THE RATING DOWN:

- Continued structural imbalance resulting from negative budget variances yielding further declines in General Fund reserve levels.

-Further economic deterioration, resulting in continued stagnation of major revenue streams and increasing pressures on city operations.

KEY STATISTICS

2000 Census population: 124,471 (5.7% increase from 1990)

2009 Estimate population: 128,500 (3.2% increase from 2000)

2010 Full valuation: $11.6 billion

2010 Full value per capita: $90,188

Sterling Heights unemployment, August 2010: 11.1%

Per capita income, 1999: $24,958 (112.6% of state)

Median family income, 1999: $70,140 (131.2% of state)

Overall debt burden: 1.7%

Direct debt burden: 0.3%

Payout of principal (10 years): 86.3%

Fiscal 2010 General Fund balance: $12.5 million (15% of General Fund revenues)

Moody's rated general obligation limited tax debt outstanding: $14.8 million

Total general obligation debt outstanding (limited and unlimited tax): $29.8 million

The principal methodology used in this rating was General Obligation Bonds Issued by US Local Governments, published in October 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, confidential and proprietary Moody's Analytics' information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Soo Yun Chun
Analyst
Public Finance Group
Moody's Investors Service

Elizabeth Foos
Backup Analyst
Public Finance Group
Moody's Investors Service

Edward Damutz
Senior Credit Officer
Public Finance Group
Moody's Investors Service

Contacts

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MOODY'S AFFIRMS Aa1 RATING THE CITY OF STERLING HEIGHT'S (MI) GENERAL OBLIGATION LIMITED TAX DEBT
No Related Data.
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