AFFIRMS Aaa RATING AND STABLE OUTLOOK ON $413.2 MILLION OF POST-SALE GOLT DEBT
General Obligation Limited Tax Notes, Series 2011
Expected Sale Date
General Obligation Limited Tax
NEW YORK, Apr 23, 2011 -- Moody's Investors Service has assigned a MIG 1 rating to Kent County's (MI) $32
million General Obligation Limited Tax Notes, Series 2011 (Taxable Obligations).
Concurrently, Moody's has affirmed the Aaa rating on the County's outstanding
general obligation limited tax debt, affecting $413.2 million post-sale. The
outlook remains stable.
SUMMARY RATINGS RATIONALE
Proceeds from the current issue will fund a tax payment fund created pursuant to
the provisions of Act 206 to make advances to units of government within the
county of amounts equaling their respective share of 2010 real property taxes
that remain outstanding and uncollected on March 1, 2011. The Notes are
ultimately secured by the county's general obligation limited tax pledge, in
addition to outstanding 2010 real property taxes due and payable to the county,
the state, and government units within the county. The county's long-term
highest quality Aaa rating is based on historically and currently healthy
operating reserves despite recent operating deficits; a large regional economy
that continues to diversify, but remains vulnerable to manufacturing concerns;
and a manageable debt burden. The stable outlook reflects our expectation that
the county will continue to adhere to its historically strong management
practices which have resulted in financial flexibility that positions the county
to manage through current economic challenges.
- Strong and experienced management team with conservative budgeting assumptions
- Healthy liquidity in both the General Fund and Delinquent Tax Revolving Fund
- Diversifying regional economy (although still above average dependence on
- Pensions over 100% funded
- Years of structural imbalances, though signs of stabilizing
- Economic challenges with revenue pressures including state shared revenue
& property taxes
- Socioeconomic indices below median Aaa rated counties nationally
DETAILED CREDIT DISCUSSION
SIZABLE, SEGREGATED PROPERTY TAX COLLECTIONS PLEDGED TO REPAYMENT
The county has an established record of timely and sufficient note
repayment, having issued tax anticipation notes for many years.
Historically, delinquent property tax collections, combined with
administrative fees and interest earnings, have been sufficient to repay
notes well in advance of note maturity. Cash flow projections provided by county
officials indicate that over 100% coverage of principal will be set aside by
September 2012, well in advance of final note maturity on April 1, 2013.
Pursuant to a 1999 change in a property tax reversion law (P.A. 123), the
county is benefiting from faster delinquent tax collections that allow for
quicker note repayment.
DESPITE RECENT DRAWS ON RESERVES AND REVENUE PRESSURES, FINANCIAL OPERATIONS
EXPECTED TO REMAIN STRONG GIVEN CURRENTLY SOLID RESERVE LEVELS; PENSION
Despite revenue pressures, the county's financial operations are expected to
remain solid given a proven record of sound financial management as evidenced by
a healthy General Fund balance, which is further augmented by a substantial
unreserved Delinquent Tax Revolving Fund (DTRF) balance. The county's General
Fund experienced consecutive years of operating shortfalls, with reserves that
declined from a high of $115.1 million, or an ample 86% of revenues in fiscal
2001 to $67.7 million, or a still solid 41.5% of revenues in fiscal 2008. While
the level of reserves declined over the years, it still exceeds the
national median fund balance of 22.4% for comparably rated counties. Management
attributes the shortfalls to lower than expected property tax and real estate
transfer tax revenues, as well as lower than budgeted investment earnings. For
fiscal 2009, the county originally projected a $5 million shortfall. In an
effort to reduce the size of this shortfall, officials implemented several
expenditure reductions, including renegotiation of inmate healthcare and a
planned delay in construction of a parks administration building and fleet
services facility. Additionally, the county transferred additional liquidity
from the Delinquent Tax Revolving Fund to support operations. With these
budgetary adjustments, the General Fund posted an operating surplus of
approximately $767,000 closing with a General Fund balance of $68.5 million, or
41.3% of revenues.
Due to continued revenue pressures, officials projected a shortfall of
approximately $3 million in fiscal 2010. In response, management implemented
various expenditure reductions and revenue enhancements in order to regain
structural balance. The changes included the elimination of 80 positions, delays
in capital outlay, temporary closing of the zoo and increases in various fees.
As a result, unaudited results indicate a modest surplus of $132,000 for fiscal
2010, closing the year with an estimated General Fund balance of $68.6 million,
or approximately 43.5% of revenues. For fiscal 2011, as revenue pressures are
expected to continue, the county budgeted the elimination of an additional 60
positions and implemented voluntary retirement which is expected to generate
substantial savings. Management does not have plans to use reserves and expects
to maintain the General Fund balance above its formal policy of retaining
reserve levels equal to 40% of expenditures. In addition, the county also
retains some financial flexibility with approximately $13 million of available
net assets in the Delinquent Tax Revolving Fund (DTRF) in fiscal 2010.
Historically, we have viewed the large reserves as a key mitigating factor to a
more economically vulnerable region. While we believe that existing liquidity
remains satisfactory, a return to persistent structural imbalance may result in
a financial profile that could become inconsistent with the highest quality Aaa
Effective October 1, 2004, the State of Michigan (GO rated Aa2/stable outlook)
temporarily suspended revenue sharing payments to counties. At the same time, to
offset the impact of the loss of this revenue stream, the state called for the
county's property tax levy to be shifted in phases from December to July over
three years under a schedule that calls for the establishment of a Revenue
Sharing Reserve Fund (RSRF). In the new RSRF, certain portions of the levy are
deposited and managed by the county, which can access this fund in an amount
equal to what it would have received in 2004 plus an inflationary adjustment for
operations. The fund will be depleted in fiscal 2011, at which time the state is
statutorily required to reinstate revenue sharing payments. The state would be
required to reinstate approximately $12 million in state shared
revenues annually; however, due to budgetary pressures at the state level,
county officials have taken a conservative budgeting approach. Notably, starting
in fiscal 2012, the county is partially budgeting approximately $8 million of
state shared revenues.
Favorably, Kent County Employee's Retirement Plan (defined benefit pension plan)
is over-funded at 100.4%, with $589.3 million in assets to address a projected
$586.8 million actuarial accrued pension liability. The county
provides post-employment healthcare benefits to retirees in the form of a
defined monthly health insurance subsidy. Calendar year 2007 marked the first
time the county contributed to a newly established VEBA Trust for the funding of
other post employment benefits (OPEB) offered to employees upon retirement. The
county's total OPEB unfunded actuarial accrued liability was a relatively
manageable $32.7 million as of fiscal 2009 and the ratio of the unfunded
liability to covered payroll was 35%.
SIZEABLE TAX BASE SERVES AS REGIONAL HUB IN WESTERN MICHIGAN; REMAINS VULNERABLE
TO ECONOMIC CYCLES
Kent County, with its largest city, Grand Rapids (GOLT rated Aa2/stable
outlook), is the regional economic hub and center of a somewhat diverse and
expanding metropolitan area. The county's sizable $43 billion tax base has been
declining at an average annual rate of -1.7% over the past five years mostly
due to the depreciation of residential and commercial properties.
Officials expect valuations to continue to decline in the near-term. The county
does have a moderate manufacturing and industrial presence, comprising 6.8% of
assessed valuation. Steelcase (senior unsecured rated Ba1/stable outlook), a
large taxpayer (0.3%) and employer reduced its workforce from a high of 10,000
in 2000 to 4,300 in 2009. Steelcase has begun rehiring with a current employment
level of 4,800.
While the region continues to be challenged by the shifting of manufacturing to
other regions as well as the contraction of domestic auto suppliers industry,
expansion in the commercial and service sectors has helped the region diversify
the local economy. Spectrum Health (Aa3/stable outlook) is the largest employer
in the region with an estimated 16,092, which is an increase from previous
years. Capital investment continues in the healthcare and education sectors
throughout the county with the recent expansion of the Van Andel Institute and
the Helen Devos Children's Hospital and the additional campus sites for the
Thomas M. Cooley Law School and Michigan State University's College of Human
Medicine. Unemployment numbers have begun to decline, with a February
2011 unemployment of 8.5% compared to the state of 11% and the nation of 9.5%.
Per capita income approximates state and national averages, while median family
income is slightly above state (102%) and national (109%) averages.
MODERATE DEBT LEVELS EXPECTED TO REMAIN MANAGEABLE; LIMITED FUTURE BORROWINGS
Moody's expects the county's debt burden to remain manageable given
limited future borrowings. The county's overall debt burden of 3.9% is largely a
function of borrowings by underlying jurisdictions, particularly school
districts. The direct debt burden is low at 0.5% due to the self-supporting
nature of a majority of the county's debt. Management indicates the county's
facilities are in good condition, limiting future capital needs. The county does
expect to continue to issue debt on behalf of underlying municipalities. All of
the county's debt is fixed rate without exposure to derivative or swap
PRINCIPAL METHODOLOGY USED
The principal methodology used in this rating was General Obligation
Bonds Issued by U.S. Local Governments published in October 2009.
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 information,
and 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 assigning a credit rating.
The outlook for this credit is stable and reflects the expectation that the
county will continue to adhere to its historically strong management practices,
which have resulted in financial flexibility that positions the county to manage
through current economic challenges. The county continues to maintain a variety
of strong credit characteristics, including more than adequate reserves and a
history of proactive fiscal management. However, the county's ability to retain
financial flexibility, absorb potential revenue shortfalls, and rebuild economic
vitality commensurate with the Aaa rating will continue to remain a focus of
future credit reviews.
What could change the rating down or outlook to negative from stable:
- A return to significant 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 county operations.
2010 Census Population: 602,622 (4.9% increase since 2000)
2011 Full value: $43 billion (1.7% average annual decline since 2006)
Direct debt burden: 0.5%
Overall debt burden: 3.9%
Principal amortization (10 years): 49.9%
County unemployment (February 2011): 8.5%
2000 per capita income: 97.6% of MI; 100.2% of U.S.
2000 median family income: 102.5% of MI; 109.4% of U.S.)
Fiscal 2009 General Fund balance: $68.5 million, 41.3% of revenues
Fiscal 2010 Unaudited General Fund balance: $68.6 million, 43.5% of revenues
Post-sale general obligation limited tax debt outstanding: $413.2 million
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.
Soo Yun Chun
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Senior Credit Officer
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
REVISED: MOODY'S ASSIGNS MIG 1 RATING TO KENT COUNTY'S (MI) $32 MILLION GENERAL OBLIGATION LIMITED TAX NOTES, SERIES 2011
Moody's Investors Service
250 Greenwich Street
New York, NY 10007