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New Issue:

REVISED: MOODY'S ASSIGNS MIG 1 RATING TO KENT COUNTY'S (MI) $32 MILLION GENERAL OBLIGATION LIMITED TAX NOTES, SERIES 2011

23 Apr 2011

AFFIRMS Aaa RATING AND STABLE OUTLOOK ON $413.2 MILLION OF POST-SALE GOLT DEBT

County
MI

Moody's Rating

ISSUE

RATING

General Obligation Limited Tax Notes, Series 2011

MIG 1

  Sale Amount

$32,000,000

  Expected Sale Date

04/27/11

  Rating Description

General Obligation Limited Tax

 

Opinion

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.

STRENGTHS

- 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 manufacturing)

- Pensions over 100% funded

CHALLENGES

- 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 FULLY-FUNDED

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 rating.

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 contracts.

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. 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 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.

Outlook

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.

KEY STATISTICS:

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.

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

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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REVISED: MOODY'S ASSIGNS MIG 1 RATING TO KENT COUNTY'S (MI) $32 MILLION GENERAL OBLIGATION LIMITED TAX NOTES, SERIES 2011
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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