Fitch Affirms Taylor, MI's LTGOs at 'BB'; Revises Outlook to Stable

Fitch Ratings affirms the following ratings on Taylor, Michigan's (the city) general obligation (GO) bonds:

--$8.8 million limited tax general obligations (LTGOs) series 2004 and 2005 at 'BB';

--$1.1 million LTGO downtown development (DDA) bonds series 2002 at 'BB';

--$16.1 million Brownfield Redevelopment Authority (BRDA) bonds, series 2005 and 2006 at 'BB';

--Implied unlimited tax general obligation (ULTGO) rating at 'BB+'.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The LTGO bonds are secured by the city's full faith and credit general obligation and its ad valorem tax pledge, subject to applicable charter, statutory and constitutional limitations.

The Downtown Development Authority (DDA) TIFA and Brownfield Development Authority (BRDA) bonds are secured by relevant tax increment revenues collected within the development area. As additional security the city has pledged its full faith and credit subject to applicable constitutional, statutory and charter limitations.

KEY RATING DRIVERS

HISTORICAL STRUCTURAL IMBALANCE; MODEST IMPROVEMENT: Four years of net deficits left the city with a sizable negative unrestricted general fund balance in fiscal 2012. Implementation of a deficit elimination plan resulted in drastic expenditure cuts in fiscal 2013 and a sizable surplus. Recurring expenditure savings project elimination of the deficit by fiscal 2016. However, considerable budgetary pressures will continue over the near term.

DECLINING TAXABLE VALUE: Taxable value (TV) has declined notably over the past five years although some stabilization is expected for fiscal 2015. Significant growth in the base is not expected in the near term.

LACK OF REVENUE RAISING FLEXIBILITY: Property taxes are the city's main revenue source and the city is currently at its property tax cap; revenue raising options are virtually non-existent.

CONTINGENT OBLIGATIONS: The general fund is obligated to support contingent obligations whose intended repayment source has not materialized. General fund support of these obligations is expected to continue to be needed over the life of the obligations.

LIMITED FINANCIAL FLEXIBILITY: The one notch difference between the LTGO and the implied ULTGO rating reflects the city's severely limited financial flexibility, as evidenced by the negative unrestricted general fund balance combined with the inability to increase property taxes or other revenues.

DEVELOPMENT BONDS CARRY LTGO PLEDGE: The DDA and BRDA bonds carry a pledge of both tax increment revenues and the city's LTGO. The ratings are based upon the LTGO rather than the pledged revenues due to revenue shortfalls and weak legal protections including the lack of an additional bonds test.

RATING SENSITIVITIES

INABILITY TO REDUCE ACCUMULATED DEFICIT: Management's inability to continue the recent trend of budgetary surpluses and progress toward deficit elimination would place downward pressure on the city's ratings.

CREDIT PROFILE

Taylor is located in Wayne County, MI, approximately 18 miles southwest of Detroit. The city has experienced a 5.2% population loss since 2000, with 62,443 residents in 2011.

PROGRESS ON REVERSING NEGATIVE GENERAL FUND BALANCE

The city of Taylor's notable decline in financial flexibility was due to management's inability to match expenditure reductions to rapid declines in property tax revenues and state shared revenues. Audited fiscal 2011 and 2012 results posted the largest of several annual general fund operating deficits, over $5 million in each year. This resulted in an unrestricted general fund deficit of $5.4 million or 11.6% of expenditures.

The city adopted and implemented a deficit elimination plan (DEP) mid-year in 2012 which included significant expenditure reductions including personnel cuts and salary and benefit concessions. Audit results for fiscal 2013 indicate a sizable operating surplus of $2.9 million (7.3% of spending. The fiscal 2013 surplus is largely due to the significant recurring expenditure reductions and modest improvement in state revenues. City property tax revenues stabilized as a result of improved collections.

Fiscal 2014 cash basis results through January 2014 project continuation of surplus operations and the achievement of a positive unrestricted general fund balance by fiscal 2016. As Taylor is at its maximum property tax rate, TV is expected to be flat at best, and state shared revenues are likely to increase only modestly, the return to positive operations will be driven by recurring expenditure cuts and labor contract savings.

The DEP outlines recurring expenditure savings from the implementation of a recently-implemented high deductible health care plan for all employees and staff reductions. Fiscal 2013 staff reductions of approximately 65 positions are expected to create annual savings of $2.6 million. Fitch believes that these recurring savings are achievable but that inherent revenue raising constraints make elimination of the deficit by 2016 a challenge. In the event that the DEP falls short, the city could seek voter approval for a dedicated police/fire or deficit-elimination levy but Fitch believes support could be limited.

Liquidity needs are being met by short-term loans of up to $7.5 million from the city's water and sewer enterprise funds. City cash flow projections indicate that the general fund will borrow $7.5 million through June 2014, similar to amounts in the last two fiscal years. The loan would be repaid using property taxes, no later than Oct. 31, 2014. Continued improvement in budgetary balance may reduce the borrowing amount in 2014 and 2015. Enterprise funds liquidity remains strong with $11.3 million, or 295 days cash on hand in fiscal 2013. Reliance on short-term borrowing in addition to amounts currently contemplated, could pressure the rating.

CONTINGENT OBLIGATIONS NOT SELF SUPPORTING

Financial operations face additional pressure due to general fund exposure to the BRDA issues. The 2005 A and B BRDA bonds were expected to be self-supporting from tax revenue captured from the building of approximately 200 homes. The housing development was delayed and only modest development is planned over the next 1-2 years. The city general fund began to subsidize repayment of the bonds in fiscal 2012 in the amount of approximately $800,000. The subsidy is expected to continue until development occurs. The city projects some excess DDA funds will be available in 2017, as some debt is retired.

The 2006 BRDA bonds were also expected to be self-supporting, however, two out of the three projects generate insufficient revenues. Total potential general fund subsidy for all BRDA issues represents approximately 2% of fiscal 2013 general fund expenditures.

LOCAL ECONOMIC CONDITIONS REMAIN UNFAVORABLE

Property taxes account for just over one-half of the city's total general fund revenue and TV has declined by over 26% since 2009. The city indicated a total decline of 1.8% in 2014 and flat to slightly increasing values thereafter based on the county auditor's projections. Fitch believes these projections may be optimistic given continued weakness in the housing market and the lagged effect on TV.

Current tax collection rates have been low at approximately 91% over the past four years. While it is the practice of Wayne County to reimburse the city for all delinquencies at the end of each fiscal year, the payment is subject to charge-backs if the county is unable to collect the delinquent taxes or sell the property. The city experienced modest improvement in collections and lower chargebacks in fiscal 2013. The top 10 taxpayers comprise a moderate 10% of total TV. Some modest development activity is expected but Fitch expects the city tax base to remain sluggish over the near term.

Taylor is located in the 'downriver' area of metropolitan Detroit and has strong ties to the auto industry which has led to a difficult economic climate. The general slowdown in the housing market coupled with a significant amount of foreclosures have put downward pressure on property values. Unemployment has improved and averaged 8.2% in 2013 which was below the county (10.7%) and the state (8.7%) but remains above the nation (7.4%). The decline in unemployment was due partially to a 1.4% reduction in the labor force over the past decade. Taylor's poverty rate was above average in 2011 at 19.5%, compared to the state at 15.7%, and the nation at 14.3%.

PENSION, OPEB & DEBT OBLIGATIONS MANAGEABLE IN NEAR TERM

Overall debt is moderate at $1,976 per capita and 4.5% of market value. The city has no plans to issue additional debt and amortization is above average with 65% of total principal retired within 10 years. Overall carrying costs for direct city and contingent debt service plus pension and other post-employment benefits (OPEB) funding are high at 37% of total governmental expenditures.

The city administers two defined benefit pension plans covering nearly all police, fire, and general government employees; court employees are covered by the state-run Municipal Employee Retirement System (MERS). Using Fitch's 7% rate of return, MERS was adequately funded at 84% in fiscal 2010 while both the city administered plans were funded at approximately 60%. OPEBs are funded on a pay-go basis; the unfunded actuarial accrued liability is high at 8% of the tax base market value.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827688

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